Figuring out whether you need to file tax
THE SARS tax filing season includes filing by expatriates and a question people often ask tax professionals is whether or not they are a tax resident in a certain country.
This is more of an issue for ultrahigh net worth individuals (UHNWIs) and families, whose global interests and lifestyle may effectively mean they live “nowhere” permanently. The South African tax system is based on residency, not citizenship.
One of the biggest areas of confusion is whether or not such UHNWIs need to file a tax return in the first place in SA, and the answer is likely to be yes, they do.
This may come as a surprise to many expatriates who mistakenly think they are exempt from filing returns. However, the reality is that filing a tax return is mandatory for all expatriates, outbound and inbound, where their income is in excess of the tax threshold or where they earn a specific type of South African income.
A key factor for a UHNWI is to determine his or her tax status as a tax resident or non-resident in SA. With the introduction of the residence basis of taxation with effect from years of assessment commencing on or after January 1 2001, a definition of resident was introduced into the Income Tax Act. A person who qualifies as a resident as defined in section 1 of the act is subject to tax in the Republic on worldwide receipts and accruals.
A resident is someone who is either ordinarily resident in SA or who falls within the requirements of the “physical presence test”.
Though the act does not define ordinarily resident, the courts have interpreted it as one who considers SA to be the place to which he or she will return from his or her wanderings. A person who is not ordinarily a resident may still be a tax resident by virtue of physical presence. The difference in filing for a resident is that he or she files a return disclosing world-wide income and capital gains, while a non-resident files disclosing his or her SA-sourced income and capital gains, subject to certain exclusions.
There is also a misconception that foreign workers in SA (non-residents for tax purposes) do not have to reg- ister as taxpayers, file tax returns or pay tax in SA as long as they spend less than 183 days a year in the country.
This is not true. While tax relief might be the end result, this is up to SARS to assess on the basis of the tax return filed. If there is no double tax agreement between SA and the country of origin, the non-resident would certainly be liable for tax on income sourced here. If a double tax agreement does apply, SARS will confirm its application before deciding if tax relief is applicable.
As with residents living and working outside SA, non-residents must file an annual tax return and keep travel and other records, which form part of the physical-presence analysis test.
In essence the physical presence test provides that where you would have been present in SA for at least 91 days/year in each of the current and previous five years, and at least 915 days in total during the previous five years, you will be regarded as a resident from the first day of the current year. Tax residency due to physical presence can be broken by leaving SA for a stretch of 330 days.
With regards to being ordinarily resident, a person’s usual or principal residence could be described more aptly in comparison to other countries as the person’s real home. The above approach was followed by the courts.
Courts in both Canada and the UK have held that a physical presence at all times is not a requisite to be ordinarily resident in a country. However, it would seem two requirements need to be present: an intention to become ordinarily resident in a country; and steps indicative of this intention having been or being carried out.
A feature of both UHNWIs and certain expatriate employees of multinational corporations is that they are virtually permanent wanderers. In such a case the burden would be on the taxpayer to discharge the onus that he/she is not ordinarily resident in SA. It is not possible to lay down any clearly defined rule as to this point.
The effect of the above is that a natural person may be tax resident in SA even if that person was not physically present during the relevant year of assessment. The purpose, nature and intention of the taxpayer’s absence must be established to determine whether the taxpayer is still ordinarily resident.
The circumstances of the person must be examined as a whole, and the personal acts of the individual must receive special attention. As stated in income tax case number 1170, one is entitled to look at the taxpayer’s mode of life beyond the particular period under consideration. It is not possible to specify over what period the comparison must be made. The comparison must cover a sufficient period for it to be possible to determine whether the person is ordinarily resident.