South Africa has a residence based tax system and persons who are residents in the Republic are taxed on their worldwide income, subject to certain exclusions. Non-residents are only taxed on their income from a source within the Republic.
A natural person can become a resident for income tax purposes by –
- being ordinarily resident in the Republic (1); or
- complying with all the requirements of the physical presence test.
Expats would not automatically fit the “ordinarily resident” description and accordingly would be subject to paragraph (a) (ii) of the definition of a “resident” in section 1(1) of the Income Tax Act, which refers to a natural person who is not at any time during the relevant year of assessment ordinarily resident in the Republic.
The requirements of paragraph (a) (ii) state the number of days that a natural person must actually be present in South Africa, during a year of assessment and also during the five years of assessment preceding the year of assessment under consideration.
The person must be physically present in the Republic for a period or periods exceeding –
(i) 91 days in aggregate during the year of assessment under consideration;
(ii) 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
(iii) 915 days in aggregate during the five preceding years of assessment.
A natural person who complies with all the requirements referred to above is a resident of the Republic, for tax purposes, for the year under consideration.
A foreign national living in South Africa may therefore become resident in the Republic for income tax purposes.
However, if a person who is exclusively a resident of a country other than South Africa for purposes of the application of a tax treaty is not a resident of the Republic under our Income Tax Act.
A natural person who meets the ordinary residence test or the physical presence test will therefore not be a resident of South Africa if, notwithstanding having met those tests, that person is held to be exclusively a resident of a country other than South Africa for purposes of the application of any tax treaty. For example, the tax treaty might include a principal definition of “resident” that differs from the definition in section 1(1) or the application of the tie-breaker rules might result in the natural person being held to be exclusively a resident of the other contracting state.
It is thus extremely important that a registered tax practitioner evaluates and considers the tax position and residency of an expat. TaxAdvise Consulting offers an exclusive, personalised and cost effective professional tax and related services for resident and non-resident individuals and corporate entities.
Written by Maya Nikolova, Business Accountant in Practice, Master Tax Practitioner (SA)
B Com, PG Dip TAX, Managing Partner, www.taxadvise.co.za