What does it mean to be tax resident in South Africa?

If South Africa is your home, you will most likely be a tax resident and subject to South African tax on income you earn from anywhere in the world.

What does it mean to be tax resident in South Africa?

If you are a tax resident, you need to declare and pay tax on income from employment or running a business as well as income or dividends from investments that you earned from anywhere in the world, even if that income is paid to you in a bank account in another country.

You also need to declare any capital gains you make on any investments, properties or businesses you sell or dispose of anywhere in the world. If these gains are taxable ones, you will need to pay capital gains tax (CGT) and if they are also taxable in another country, you will need to check if there is an agreement between the two countries (a double taxation agreement) on which country will levy the tax.

As a South African resident, you are also liable for donations tax on any taxable donations and when you die, your estate may be subject to estate duty. If you have assets in other countries, you will also need to determine whether the other country will also levy tax and if there is double taxation agreement with South Africa.

If you are living in South Africa but receiving a pension from a foreign country that is a result of your having worked overseas, the pension is currently exempt from tax, but you may still need to declare investment income earned in South Africa.

What does it mean if you are a non-resident for tax purposes in South Africa

If you are not a resident for tax purposes in South Africa, you will only pay tax on income that is sourced from South Africa. This means tax on:

• Taxable income earned from employment in South Africa;
  
  
• Taxable interest income or dividends from investments in South Africa;
  
  
• Taxable capital gains from property held in South Africa.

If you are not resident, you will only be liable for estate duty on your South African assets.

What determines if you are a South African tax resident?

There are two tests used to determine if you are a resident of South Africa. The first is based on common law and bit more vague than the second one.

1.  Ordinary resident or intention test

In terms of the first test, you are considered a resident of South Africa if you ordinarily return to this country after your travels or temporary absences and it is your intention to live here.

You are a resident of South Africa if this is where you regularly live with a degree of permanence and your economic activities, social life and your belongings are mainly in South Africa.

If you regard yourself as not resident, you should have some documentary evidence that you have moved your life to another country.


2. The physical presence test

If you are not a resident in terms of the ordinary resident test, the physical presence test is applied.

In terms of this test, the time you spend in South Africa is considered and you are a resident if you were in the country for:

• 91 days in total during the relevant tax year (March 1 to February 28 or 29);
  
  
• 91 days in total during each of the five tax years preceding the tax year; and
  
  
• 915 days in total during the five years preceding the tax year in which you are being assessed.

If you do not meet any one of these three requirements – or you spend 330 continuous days outside of South Africa, you are not regarded as a resident for tax purposes.

Foreign employment

If you are ordinarily resident in South Africa, but take up an offer to work outside of the country for a while and do not want to formally become a non-resident, you can use a tax exemption for the income you earn from foreign employment.

This tax exemption entitles you to earn up to R1.25 million each tax year from working overseas without paying tax on that income as a South African resident. The exemption applies to your gross foreign income – that is income and any benefits or bonuses before any tax or other deductions are made.

The exemption is provided in the Income Tax Act in section 10(i)(O)(II) and it may be

referred to as the foreign employment exemption or as the section 10(i)(O)(II) exemption.

In order to qualify for this exemption, you must:

• Be away from South Africa for more than 183 full days in any 12-month period (that is not necessarily a tax year, but the period must start or end in the tax year); and
  
  
• Be away from South Africa for a continuous period of 60 full days in that 12-month period.

The exemption only applies if you are employed – it does not apply if you work as an independent contractor.

Even if the exemption applies, you have to declare your income on a South African tax return – you must declare it and then claim the exemption and any tax credits for the tax you have paid in the country in which you are working.