Ceasing to be tax resident in South Africa

With internationalisation of the South African workforce, employees taking up employment abroad on fixed-term contracts or indefinitely need to consider the implications of ceasing tax residency in South Africa.

Ceasing to be tax resident in South Africa

Source: Jacques Fourie, Maitland, London

With internationalisation of the South African workforce, employees taking up employment abroad on fixed-term contracts or indefinitely need to consider the implications of ceasing tax residency in South Africa. Jacques Fourie, Maitland associate in London, discusses the issue with an internationally mobile employee in mind, although the principles apply equally to anyone wanting to leave South Africa.

This article focuses on the South African definition for residence, relevant case law and the practical application of ceasing to be tax resident in South Africa. Please refer to the related article by Marco Sello-Rolando on the fiscal consequences of ceasing to be resident in South Africa, such as the CGT “exit tax”, as well as the exchange control consequences of moving abroad.

The legislative framework
A “resident” under the South African Income Tax Act of 1962 means any natural person who is:

  • ordinarily resident in the Republic (the Ordinary Residence Test); or
  • not at any time during the relevant year of assessment ordinarily resident in the Republic, if that person was physically present in the Republic (the Physical Presence Test):
    • for a period or periods exceeding 91 days in aggregate during the relevant year of assessment, as well as for a period or periods exceeding 91 days in aggregate during each of the five years of assessment preceding such year of assessment; and
    • for a period or periods exceeding 915 days in aggregate during those five preceding years of assessment,

      in which case that person will be a resident with effect from the first day of that relevant year of assessment,

but does not include any person who is deemed to be exclusively a resident of another country for purposes of applying any agreement entered into between the governments of South Africa and that other country for the avoidance of double taxation.

Case law
The case of Commissioner for Inland Revenue v Kuttel 1992 (3) SA 242 (A) 54 SATC 298 is the most recent decided case by the Special Court of Appeal on the meaning of ordinary residence. This case is particularly helpful because, unlike the Physical Presence Test which is purely mechanical, the term “ordinary residence” is not defined in the SA Income Tax Act.

Mr Kuttel emigrated to the United States of America during 1983.  Despite his emigration, the Commissioner for Inland Revenue assessed Mr Kuttel to income tax on interest and dividends earned in South Africa. (Persons not ordinarily resident in South Africa were exempt from income tax on interest and dividends earned at that time.)

The court held that:

  • it could objectively be confirmed that Mr Kuttel decided to emigrate to the USA and that he took steps to set up a home there;
  • Mr Kuttel’s visits to South Africa were not for purposes which one would associate with ”returning home”. Mr Kuttel came to South Africa to see to his assets, for business purposes and to relax;
  • it was not inconsistent for Mr Kuttel to keep an interest in a South African beach property. He had sound financial reasons to do so; and
  • Mr Kuttel discharged the burden of proof on him that he ceased to be ordinarily resident in South Africa when he emigrated and acquired residence in the USA.

Practical application
The definition of a “resident” under the South African Income Tax Act provides for two tests to establish South African tax residence, namely the Ordinary Residence Test and the Physical Presence Test.

Often, the most difficult aspect from a tax point of view for employees leaving South Africa to take up employment abroad is to break their ordinary residence under the Ordinary Residence Test. Although the Ordinary Residence Test goes to an employee’s subjective intention, this would have to be demonstrated by objective factors, such as described below.

Ordinary residence test
In order for an employee to replace his “ordinary residence” under the Ordinary Residence Test, he would have to reorganise his life so that the country to which he is moving was the country:

  • to which he would return from his wanderings;
  • where he would unpack his suitcases;
  • where he would keep his “pipe” and “slippers”; and
  • which would be the centre of his business and social interests.

A strong indicator that an employee had replaced South Africa with a new country to become the centre of his business interests would be his full-time employment by an overseas employer.

Another strong indicator would be for the employee to acquire fixed property in the country to which he is moving.

Other steps that an employee should take in support of the argument that he ceased to be ordinarily resident in SA are:

  • opening operating bank accounts in his new country of residence and closing his SA operating bank accounts;
  • buying a car;
  • registering with the overseas national security schemes (e.g. NHS and National Insurance in the UK);
  • renting out any properties in SA (holiday properties need not be rented out, however, as long as they are clearly holiday properties);
  • establishing memberships in his new country and becoming an overseas member of clubs in SA; and
  • disposing of non-strategic investments in SA.

Physical presence test
Once an employee has taken the decision to leave South Africa, he would have to be mindful of not remaining resident in South Africa under the Physical Presence Test. This could easily happen, with work and family visits to South Africa.

The Physical Presence Test would only apply to an employee in any given tax year when he was not ordinarily resident in South Africa during that year under the Ordinary Residence Test.

However, if an employee who ceased to be resident in SA under the Ordinary Residence Test often returns to South Africa (whether for business or leisure), such employee would have to spend fewer than 92 days in South Africa during the tax year after which he ceased to be resident in South Africa under the Ordinary Residence Test in order to avoid becoming resident in South Africa under the Physical Presence Test (assuming that the employee was physically present in South Africa for a total of more than 915 days in the 5 preceding years of assessment).

Effect of treaty residence
The last issue to consider under the definition of a “resident” under the Income Tax Act is treaty residence.  Where an employee who is a dual resident of South Africa and say, the UK, is deemed to be exclusively resident in the UK by virtue of the “tie-breaker” clause in the South Africa/UK Double Tax Agreement (DTA), he is deemed to be non-resident in SA under the SA Income Tax Act.

So even if an employee does not succeed in terminating his tax residence in South Africa, he would be considered as non-resident for tax purposes if he acquires tax residence in a country with which South Africa has a DTA and that treaty determines the employee’s residence in that other country