Tick-box approach to tax does not a non-resident make

The process to cease SA tax residence has been subject of a lot of opinions and assumptions during the past few years. The topic has become a central point of discussion since the Treasury suggested the amendment of the foreign exemption to render foreign earnings taxable.

The most important aspect of the ceasing of SA tax residence is the deemed disposal of worldwide assets in terms of section 9H of the Income Tax Act. The primary reason for the option in tax returns to notify the SA Revenue Service (Sars) of a taxpayer’s change of tax residence was to ensure that the capital gain from the deemed disposal of the taxpayer’s assets was included in the relevant return.

However, this also created a lot of confusion regarding the process to cease SA tax residence. Many tax professionals advised that simply “ticking the box” would be a sufficient step to take to formalise non-residence with Sars.

In fact, the consideration of whether an individual is a resident or not for purposes of the Act is not as easy as stating that you intend to remain abroad, or that you regard yourself as a non-resident. Previous precedent such as the Cohen and Kuttel cases has proven that there are several factors to consider whether an individual is factually non-resident, because it is not specifically defined in the Income Tax Act.

A legal explanation of a taxpayer’s situation will therefore always be required for Sars to consider an individual’s tax residence. It was evident that the “tick box” approach in income tax returns did not lead to a non-residence status over the years. Taxpayers were able to tick the box, which simply opened an extra window on the return to allow the taxpayer to declare the capital gain resulting from the deemed disposal of their assets.

This option was available to taxpayers only in more recent years, and in the 2021 tax return Sars allowed taxpayers to enter any previous date they considered themselves to have ceased tax residence. The ticking of the box in the 2021 tax return did lead to verification of some taxpayers’ returns, but in the majority of the cases it did not result in any consideration being made on a taxpayer’s residence status.

Sars changed its approach for the 2022 tax year and removed the option to “tick box” to ensure taxpayers notify Sars of their non-residence through the manual route. This enables Sars to conduct a thorough review of each taxpayer's tax status in accordance with the Income Tax Act and previous legislation.

Sars’s new approach to reviewing taxpayers' residence statuses makes it far easier for taxpayers to determine whether they are a non-resident on Sars's systems or not. A taxpayer can simply open their 2022 tax return and see if their “Taxpayer ceased to be a tax resident of the RSA” box has an X in it, and whether it reflects the date on which they ceased to be a resident.

If the box is not prepopulated with an X and the date, the taxpayer is not recognised as a non-resident for tax purposes on Sars’s system. It must be noted that Sars is inconsistent with whether it has added a taxpayer’s date of ceasing residency, even when a taxpayer has formally done this previously.

It is also evident that taxpayers who simply “ticked the box” in previous returns and did not formalise their non-residence subject to the strict review by Sars do not have a prepopulated “ceased to be a resident” box in their 2022 tax return.

The box will be greyed out and the taxpayer will need to formalise their non-residence through the manual route, which is commonly referred to as tax emigration.

It is important to note that taxpayers who underwent the process of tax emigration after the submission of their 2022 tax return will not have their ceasing box automatically updated, and will need to ensure they are in possession of their notice of non-resident letter.

• Van Rensburg is expatriate tax legal specialist, and Leon managing partner, attorney and tax practitioner at Leap Group.