PART 2: UNDERSTANDING THE TESTS FOR TAX RESIDENCY CESSATION IN SOUTH AFRICA
By Mbuyisile Nukeri and Rizquah Mahomed
South Africans who relocate abroad often assume that leaving the country is enough to end their South African tax residency. In reality, ceasing tax residency is determined by the application of specific legal tests.
SARS applies three primary tests when determining an individual’s tax residency status: the Ordinarily Resident Test, the Physical Presence Test (“PPT”), and, where applicable, the provisions of a Double Tax Agreement (“DTA”).
This article forms part of a broader series unpacking the key legal, practical and tax implications of ceasing South African tax residency.
The Ordinarily Resident Test
The Ordinarily Resident Test is the primary test used to determine an individual’s South African tax residency status.
It is a factual test that considers all the facts and circumstances relating to the individual. Broadly, a person will be regarded as ordinarily resident in South Africa if South Africa is the place they regard as their true home, the country to which they would naturally and, as a matter of course, return after periods spent abroad. In other words, it is the jurisdiction where the individual’s personal, family and economic life is primarily centred. SARS and the courts generally consider factors such as:
• The location of their permanent home;
• Where the individual’s family is located;
• Their employment or business interests;
• Personal and social ties;
• The location of significant assets; and
• Their intention regarding where they regard their permanent home to be.
If your South African tax residency ceases based on ordinary residence (which considers intention and your overall circumstances), you can only become South African tax resident again if you either re-establish ordinary residence or meet all the requirements of the Physical Presence Test.
The Physical Presence Test (PPT)
The PPT considers only the number of days you are physically present in South Africa over a rolling period of six tax years.
It is only relevant where an individual is not ordinarily resident in South Africa but spends time in South Africa in excess of the prescribed periods.
A person triggers South African tax residency under the PPT only if all three of the following requirements are met:
• More than 91 days of physical presence in South Africa in the current tax year; and
• More than 91 days of physical presence in South Africa in each of the five previous tax years; and
• More than 915 days of physical presence in South Africa in total across those five previous tax years.
If any one of these requirements is not met, the PPT does not apply, and South African tax residency is not triggered by virtue of the PPT. Importantly, if the PPT is broken, the counting process starts again from the next tax year.
Unlike many other jurisdictions, South Africa does not apply a simple 183-day residency test, notwithstanding that 915 days over five years equates to an average of 183 days per year. The PPT is more nuanced, requiring consideration of an individual’s physical presence in South Africa across both the current tax year and the five preceding tax years.
Where a person is found to be tax resident based on the PPT, and they are subsequently physically outside South Africa for a continuous period of at least 330 full days immediately after the day on which they cease to be physically present, that person’s tax residency is deemed to have ceased on the day they left South Africa.
Double Tax Agreements (DTA)
DTAs are a key component of international tax law and are concluded between countries to prevent double taxation by allocating taxing rights exclusively to one of the treaty jurisdictions.
Where an individual is considered a resident of both South Africa and another country under the domestic laws of both jurisdictions, a DTA may contain a tie-breaker provision that determines in which country the individual will be regarded as exclusively resident for treaty purposes.
DTAs generally resolve residency conflicts by applying the following tests in order:
• Permanent home;
• Centre of vital interests (personal and economic relations);
• Habitual abode;
• Nationality; or
• Mutual agreement between the competent authorities of the two countries.
As SARS continues to place greater emphasis on the substance of non-residency claims, taxpayers should ensure that they have sufficient evidence to support the basis on which they claim to have ceased South African tax residency, particularly where reliance is placed on a DTA.
Understanding which residency test applies is only one part of the process. The real challenge is ensuring that your personal circumstances align with the legal requirements and that you have sufficient evidence to support your position should SARS enquire.
At Arro, we assist clients with the cessation of South African tax residency as part of our cross-border tax and advisory offering. This includes guiding clients through the legal basis for cessation, aligning their factual circumstances with the relevant tests, and supporting the practical implementation of the RAV01 update and SARS engagement process.
If you would like assistance in assessing your South African tax residency position or navigating the cessation process, our team would be pleased to assist. Visit www.arro.co.za or email lauren@arro.co.za.
