Fig­ur­ing out whether you need to file tax

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - BERNIE HERBERG

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.

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