Many South African expatriates have unknowingly missed out on paying lower taxes in South Africa for years while living abroad, due to confusing or misguided advice that they must reside outside the country for a number of years before officially ceasing tax residency in South Africa.

A South African professional who lived and worked in the Netherlands for the past five years, only recently discovered, he was ill-advised that he had to wait five years from the time of leaving South Africa permanently, before he could cease tax residency.

Now, five years have passed during which the individual filed annual tax returns with the South African Revenue Service (SARS) as a tax resident, declaring and being taxed on his worldwide income. Had he been classified as a non-resident taxpayer from his date of exit, SARS would only have taxed him on his South African sourced income for the past five years.

The individual was unaware that he could have followed the once-off cessation process with SARS, as soon as his intention to permanently reside outside of South Africa was clear when he physically departed South Africa. This would have ensured a significant lower tax liability.

South Africa operates on a residence-based tax system for individuals, treating tax resident taxpayers different from non-resident taxpayers. Ceasing tax residency, for individuals who leave South Africa permanently, changes their tax status from that of South African tax resident to a non-resident.

South African expats should note that they do not have to wait for Permanent Residency, citizenship, or for anything else to be concluded in their new country to apply for tax relief on worldwide income through the formal process of ceasing tax residency with SARS. They can embark on this process on the day they physically leave South Africa with the intention to no longer be obligated to pay tax on their hard-earned foreign income.

Three-year waiting period also a myth

In client consultations, Tax Consulting South Africa also encountered expats who have been incorrectly informed they must wait 3 years before they can embark on the process of ceasing tax residency, like a client who has been in Europe for three years, waiting it out to cease tax residency.

During this “waiting period”, he paid full tax on his worldwide income, and all the while this could have been avoided. The only way forward for this taxpayer is to formalise a backdated cessation application and thereafter claim relief on overpaid taxes, which involves a formal process and objection with SARS. 

The 3-year rule is clearly confused with a totally unrelated issue and has no bearing on cessation of tax residency.

The 3-year lock-in rule in fact applies to early lump sum retirement withdrawals by South Africans who have already ceased tax residency. The rule, implemented in March 2021, states that people who are no longer South African tax residents, must maintain this status for at least three consecutive years before they can access and withdraw their full retirement (RA) and preservation funds.

Why the confusion?

It seems certain advisors, even from big corporates, started using the 5-year waiting period as a rule of thumb, in all likelihood confusing it with the requirement in countries such as the UK or the Netherlands, that individuals must continuously reside in the country for 5 years to be eligible for citizenship. 

Some tax advisors also misunderstand the physical presence “days” test to be the only solution to ceasing once tax residency in South Africa. 

Remedies

Expats face a significant challenge when, after waiting five years to formalise their non-tax residency status, they realise they have followed incorrect tax advice and failed to declare their foreign income to SARS during said time. This non-compliance often results in a substantial tax liability when they eventually approach SARS to formalise their non-residency.

On the other hand, those who have been tax compliant, can face a complicated process to backdate cessation of tax residency to the day they physically left South Africa in order to try and recover overpaid taxes.

Anyone finding themselves in such a situation, should consult an expatriate and cross-border tax specialist, without delay.

Pay your dues, but not more 

While every taxpayer should, of course, fully comply with tax laws, there's no reason to pay more tax than necessary. South Africans considering relocating abroad, should prioritise proper tax planning to avoid unexpected tax issues or paying more than legally required. 

Written by John-Paul Fraser, Team Lead: Cross Border Taxation at Tax Consulting SA; and Chavaughn Phillips, Expatriate Tax Specialist at Tax Consulting SA