Are you a South African tax resident individual?

The question of tax residence for individuals has always been relevant in South Africa. It appears as though we find ourselves in a country which has always been a popular destination to which people from across the globe flock to set up businesses, but also a country from which people often travel for long-term stints overseas, or sometimes even permanent relocation.

The tax residence of individuals are important for people with ties to South Africa. South Africa charges tax resident individuals with income tax on their world-wide income, and non-tax resident individuals on their South African source income. The taxation of income from sources other than South Africa is therefore at stake here.

‘Tax residence’ is often confused with residence as would be applied for immigration purposes. It is very important to understand that tax residence is not determined by the passport that you hold. Rather, very different tests are applied.

In terms of the Income Tax Act, 58 of 1962, a person can be resident by virtue of being ‘ordinarily resident’ in South Africa, or by virtue of being physically present in the country for a predetermined amount of days.

‘Ordinarily resident’ is an undefined term in the Income Tax Act, but it refers to where a person’s ‘real’ home would be. Our courts have in the past explained that this would be ‘… the country to which [an individual] would naturally and as a matter of course return from his [or her] wanderings…’. (Cohen v CIR [1946] 13 SATC 362). Therefore, irrespective of whether one spends years in another country (and even acquire a passport there as a result), if one’s family and friends remain in South Africa, and the intention was always to return to South Africa at some stage and to settle here, it is quite possible that tax residence would have remained in South Africa throughout by virtue of the ‘ordinarily resident’ test.

The ‘physical presence test’ determines that, despite not being ‘ordinarily resident’ in South Africa, a person may still be considered South African tax resident if he/she spends enough time here. A person is considered to be a South African tax resident if he/she spends at least 91 days a year in the country, as well as 91 days in aggregate in each of the preceding 5 tax years. However, throughout this 5 year period, the person must have spent at least 915 days in South Africa in total. (A person would cease to meet the physical presence test if, after becoming resident, he/she spends 330 continuous days outside of South Africa.)

From the above, one would realise that it is quite possible for an individual to be considered resident for tax purposes in more than one country. This may potentially give rise to double taxation. South Africa has concluded numerous ‘double tax agreements’ with various countries across the world to cater for exactly this occurrence, and these treaties would include further criteria to determine in which of the two countries a person would be regarded as being tax resident to ensure that double taxation does not arise. This however, even more so than the domestic residence test explained above, may become quite involved.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)