On 22 February 2023, the 2023 Budget Review was presented, mainly focusing around the energy crisis in South Africa. However, as usual, there are proposed amendments to the tax legislation. In recent years, there has been a continual and concerted effort at targeting South Africans who are living abroad, whether it be changing the foreign employment exemption or clamping down on those who fail to declare their foreign income.
Tax Residence and the Loophole
The 2023 budget review provided us with another example that ever-changing expatriate tax law will continue to impact South Africans who do not formalise their non-residence with SARS in time to align their factual situation with their SARS tax residence status.
The effect of ceasing tax residence in South Africa is that a taxpayer who ceases to be a resident will have two years of assessment during the 12-month period of the tax year in which they become non-resident. The reason for this is that their year of assessment is considered to have come to an end on the day just before their tax residency ceased and their next succeeding year of assessment will start on the very next day.
This creates an automatic loophole regarding annual exemptions and exclusions because these non-residents will have access to the same amount of exclusion, twice a year. The government already addressed this loophole in the 2022 Budget Review by apportioning the interest exemption and capital gains tax exclusion but did not consider the effect of contributions made to retirement funds and tax-free investments in South Africa.
Proposed Amendments
Due to the two years of assessments, a taxpayer who ceases to be a resident can contribute up to R72 000 towards a tax-free investment and deduct up to R700 000 pension funds contributions made over the 12-month period of the tax year they cease to be a resident. However, this is if the provisions of the Income Tax Act are theoretically strictly applied, and not necessarily the case practically because at the end of the day, only one return is submitted, and one assessment is raised. But to eliminate this inconsistency the government proposed in the 2023 Budget Review that the contribution limit of tax-free investments and the retirement funds contributions deduction limit be apportioned over the two years of assessment created by the ceasing of tax residence.
The maximum amount of R36 000 that can be contributed towards a tax-free savings account during a year of assessment will be apportioned over the two years of assessment during the 12-month period in which an individual ceases to be a tax resident in South Africa. Also, the maximum deduction of retirement funds contributions of R350 000 will also be apportioned over the two years of assessment created by the ceasing of an individual’s tax residence.
Although these proposed changes do not in effect have an immense negative impact on individuals ceasing to be residents, but only rectify the inconsistency of the Income Tax Act against its own rationale, it does remove the loophole that was available for taxpayers who ceased to be residents in recent years. It also emphasises the government’s continuous focus on South Africans leaving the country and that the tax laws can be amended and impact expatriates during any year of assessment.
SARS versus the Taxpayer
South Africans abroad have been a large focus for SARS as they ramp up collection abilities, follow through with referrals for criminal prosecution, and have an ever-strengthening system of obtaining information from foreign jurisdictions.
South Africans abroad are often left with a bad taste in their mouth and are indignant of the thought of paying tax in South Africa on their foreign earned income. Often their view is that they simply will not do it – unfortunately, the law is not on their side. Legislation is clear that as long as one remains a tax resident of South Africa, their worldwide income and assets will fall within the South African tax net. To avoid being taxed on that foreign income, the law provides different options which only work, when utilised. The view of hiding from SARS is not only dangerous from a penalty and criminal perspective, but also unlikely in the long run. The Common Reporting Standard ensures that your information is being shared with SARS, so there is no place to hide that foreign income.
South Africans who are living abroad on a permanent basis are urged to formally note their change of tax residence with SARS to remove themselves from the ever-changing expatriate tax law.
Those that are not permanently abroad are urged to make use of the other available mechanisms to mitigate tax such as a Double Tax Agreement or the foreign employment exemption of R1.25mil. None of these options are automatic – one must prove to SARS that the requirements have been met to gain the advantage.
