How Sars know you're taxable on your foreign earnings
When the South African Revenue Service (Sars) considers a natural person to fall within the ambit of either of two categories below, they will be regarded to be a "resident" of South Africa, and therefore subject to tax on their worldwide income.
In terms of the SA Income Tax Act, a "resident" means any:
(a) natural person who is -
(i) ordinarily resident in the Republic; or
(ii) not at any time during the relevant year of assessment ordinarily resident in the Republic, if that person was physically present in the Republic -
(aa) 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
(bb) for a period 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.
To fall within the "ordinarily resident" definition, certain criteria must be considered. When an individual meets these criteria, it can be found that they are "ordinarily resident", even though they were not physically present in South Africa in that particular tax year of assessment.
Caution must be taken when an individual spends time abroad, perhaps with the intention to emigrate eventually. If the individual does not make it clear that they have emigrated or that they intend to do so, it can still be possible for Sars to assess them as "ordinarily resident" in that particular year of assessment.
A good example is the approach taken in Cohen v CIR (1946 AD 174, 13 SATC 362), where the court considered factual circumstances, such as the taxpayer's temporary visits outside SA and the fact that the taxpayer and his family would always return to their home in SA even though they were not physically present in SA for an extensive amount of time.
The court thus found that a person can be ordinarily resident even if they are not physically present in a specific year of assessment.
Individuals should further be cautioned that there is a difference between emigrating from South Africa for exchange control purposes (financial emigration) and no longer being regarded as tax resident in South Africa. A person can live abroad for a number of years but still be regarded as a SA resident (for tax purposes and exchange control purposes). A South African resident is a person, whether South African or any other nationality that has taken up residence, is domiciled or registered in SA for exchange control purposes.
In order for a SA resident to emigrate from SA for exchange control purposes (and become permanent resident in another country), they need to apply to the Authorised Dealer, i.e. a commercial bank in SA, prior to departure to obtain access to the facilities as per the Exchange Control Regulation Act, 1961. These facilities would include, for example, the foreign capital allowance (of up to R10m for a single person and R20m per family unit, per calendar year.
When an individual emigrates for exchange control purposes, they are deemed to have disposed of all their assets on capital account, and all assets exceeding the foreign investment allowance is subject to payment of an exit charge.
Individuals should be mindful that while they may not be considered to be tax resident in SA, they will still be subject to the exchange control regulations, if they have not formally emigrated for exchange control purposes. A person will only be considered nonresident for exchange control purposes once they have formally applied to the Authorised Dealer to emigrate from SA.