An analysis of ceasing to be tax resident in South Africa SK Mac Hutchon
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An analysis of ceasing to be tax
resident in South Africa
SK Mac Hutchon
orcid.org/0000-0002-3168-7904
Mini-dissertation accepted in partial fulfilment of the
requirements for the degree Master of Commerce in
Taxation at the North-West University
Supervisor: Prof K Coetzee
Graduation: May 2020
Student number: 31374743ACKNOWLEDGEMENT
To those people in my life who knew I could do this:
Thanks to my family who kept me sane and gave me the encouragement to finish;
To my friends who accepted my absences and stood by me through this process;
To God and the prayers from my small group that kept be going;
To my study leader Karina Coetzee, who gave me guidance.
iABSTRACT
Since the announcement of the change in the foreign employment exemption in the National
Budget in 2017, and the increase in the global networking, as well as political uncertainty in South
Africa, many South Africans have left the country, either on a temporary or permanent basis, to
start a new life somewhere else.
The implications of leaving South Africa permanently, is a decision that will affect a person, both
practically, and from a tax and exchange control perspective. The facts and circumstances for
each person exiting South Africa need to be addressed on a case by case basis to determine how
he will be affected from a tax and exchange control point of view.
SARS has a comprehensive set of residency rules that need to be applied from a tax perspective
and there is international case law and double tax agreements that need to be examined in order
to determine a person’s tax position. From an exchange control perspective further rules and
regulations exist where a person wish to exit from South Africa permanently and extract their
remaining assets from South Africa in the most productive way possible. Emigrating from an
exchange control perspective will also affect any future transactions taking place when that
person wishes to transact with South Africa in the case of investment and receiving an inheritance.
In comparing the tax legislation and exchange control restrictions in South Africa to that of India
and Russia sought to determine the similarities the three countries may exhibit. All three countries
being regarding as developing nations with large numbers of persons exiting their country of origin
to relocate to other parts of the world.
In making the comparison between South Africa, Russia and India it can be seen that South Africa
has a more advanced set of rules surrounding the breaking of tax residency that can be used as
a guide by Russia and India in protecting the extent of their tax revenue leaving their shores on
emigration. From a domestic perspective, it could be recommended that SARS implement a
practical system in order to monitor the change of taxpayer’s residency to help align the legislation
with the practical implementation and the interaction between SARS and the SARB. South Africa
has a firm set of legal guidelines and interpretation surrounding the ceasing to be resident. The
practical application of the law, however, does not always align with the legislation.
iiKEYWORDS USED
Ceasing to be resident
Double taxation agreement
Exchange control residency
Natural person
Tax residency
iiiTABLE OF CONTENTS
ACKNOWLEDGEMENT.................................................................................................. I
ABSTRACT .................................................................................................................. II
KEYWORDS USED ...................................................................................................... III
TABLE OF CONTENTS ................................................................................................ IV
LIST OF ABBREVIATIONS ........................................................................................ VIII
LIST OF FIGURES ........................................................................................................ IX
CHAPTER 1: INTRODUCTION...................................................................................... 1
1.1 Introduction......................................................................................................... 1
1.2 Background to study ........................................................................................... 2
1.3 Motivation of the study ........................................................................................ 4
1.4 Reference to previous studies ............................................................................ 6
1.4.1 Study one ........................................................................................................... 6
1.4.2 Study two............................................................................................................ 6
1.5 Problem statement ............................................................................................. 7
1.6 Research objectives ........................................................................................... 7
1.6.1 Primary objective ................................................................................................ 7
1.6.2 Secondary objectives.......................................................................................... 7
1.7 Research methodology ....................................................................................... 8
iv1.8 Chapter overview .............................................................................................. 10
1.8.1 Chapter 1: Introduction ..................................................................................... 10
1.8.2 Chapter 2: The definition of tax residency ......................................................... 10
1.8.3 Chapter 3: A comparison .................................................................................. 10
1.8.4 Chapter 4: Summary and conclusions .............................................................. 11
CHAPTER 2: THE DEFINITION OF TAX RESIDENCY ............................................... 12
2.1 Introduction....................................................................................................... 12
2.2 Domestic tax legislation .................................................................................... 12
2.2.1 The first residency test – being ordinarily resident ............................................ 15
2.2.2 The second residency test – the physical presence resident ............................ 19
2.3 The application of a double taxation agreement................................................ 20
2.3.1 Article 4 of the OECD Model Tax Convention ................................................... 22
2.3.2 Tax resident in two countries ............................................................................ 23
2.3.3 The application of a DTA in a South African context ......................................... 24
2.4 Exchange control .............................................................................................. 24
2.4.1 Exchange control restrictions applicable to natural persons .............................. 25
2.4.2 Exchange control residency .............................................................................. 27
2.5 Permanent residency ........................................................................................ 28
2.6 Ceasing to be tax resident for income tax purposes ......................................... 29
2.6.1 Domestic legislation .......................................................................................... 29
2.6.1.1 Practical implications of ceasing to be a tax resident ........................................ 33
2.6.1.1.1 Current SARS practice when filing an income tax return ................................... 33
v2.6.1.1.2 Two years of assessment in a 12-month period ................................................ 34
2.6.1.1.3 Income earned from a South African source ..................................................... 37
2.6.1.1.4 Taxes due to SARS in respect of the exit charge .............................................. 38
2.6.2 Ceasing to be tax resident in terms of the ordinarily residence test................... 39
2.6.3 Ceasing to be tax resident in terms of the physical presence test ..................... 41
2.6.4 Ceasing to be a tax resident in terms of a DTA ................................................. 42
2.7 Ceasing to be a resident for exchange control .................................................. 43
2.7.1 Tax clearance application ................................................................................. 44
2.8 Ceasing to be a permanent resident ................................................................. 45
2.9 Conclusion ........................................................................................................ 45
2.9.1 Income Tax....................................................................................................... 46
2.9.2 Permanent residency and citizenship ............................................................... 47
2.9.3 Exchange control .............................................................................................. 47
2.9.4 Summary table ................................................................................................. 48
CHAPTER 3 – A COMPARISON ................................................................................. 49
3.1 Introduction....................................................................................................... 49
3.2 Tax residency in India ....................................................................................... 50
3.2.1 Domestic tax legislation .................................................................................... 50
3.2.2 Ceasing to be tax resident ................................................................................ 51
3.2.3 Double Taxation Agreements ........................................................................... 53
3.2.4 Permanent residency and citizenship ............................................................... 53
3.2.5 Ceasing to be resident from a visa/citizenship perspective ............................... 54
vi3.2.6 The emigration of Indian nationals for purposes of employment ....................... 55
3.2.7 Exchange control .............................................................................................. 55
3.3 Tax residency in Russia.................................................................................... 58
3.3.1 Domestic tax legislation .................................................................................... 58
3.3.2 Ceasing to be a tax resident ............................................................................. 59
3.3.3 Double Taxation Agreements ........................................................................... 59
3.3.4 Permanent residency and citizenship ............................................................... 60
3.3.5 Exchange control .............................................................................................. 61
3.4 A comparison.................................................................................................... 62
3.4.1 Income tax ........................................................................................................ 62
3.4.2 Permanent residency and citizenship ............................................................... 63
3.4.3 Exchange control .............................................................................................. 64
3.5 Conclusion ........................................................................................................ 65
3.5.1 Summary table ................................................................................................. 66
4.1 Conclusion ........................................................................................................ 68
4.2 Research objectives ......................................................................................... 68
4.2.1 First secondary objective .................................................................................. 68
4.2.2 Second secondary objective ............................................................................. 70
4.3 Overall conclusions and recommendations....................................................... 71
REFERENCE LIST ....................................................................................................... 73
viiLIST OF ABBREVIATIONS
For the purposes of this document, the following acronyms apply:
Acronym Description
AEOI Automatic Exchange of Information
BRICS Brazil, Russia India, China and South Africa
CBR Central Bank of Russian Federation
CBDT Central Board of Direct Taxes
CGT Capital Gains Tax
CMA Common Monetary Area
CRS Common Reporting Standard
DTA Double Taxation Agreement
FATF Federal Tax Services
FTS Federal Tax Service of Russia
HUF Hindu Undivided Family
MTC Model Tax Convention
OCI Overseas Citizen of India
OECD Organisation for Economic Co-operation and Development
OEEC Organisation for European Economic Co-operation
PIO Persons of Indian Origin
RBI Reserve Bank of India
SARB South African Reserve Bank
SARS South African Revenue Service
UK United Kingdom
UN United Nations
USA United States of America
viiiLIST OF FIGURES
Figure 2-1: A typical loop structure ................................................................................. 26
ixLIST OF TABLES
Table 2-1: Illustration of becoming resident in South African in terms of the physical
presence test after ceasing to be ordinarily tax resident ............................... 41
Table 2-2: Summary of residency ................................................................................. 48
Table 3-1: Income tax comparative summary................................................................ 66
Table 3-2: Exchange control comparative summary...................................................... 67
Table 3-3: Immigration comparative summary .............................................................. 67
xCHAPTER 1: INTRODUCTION
1.1 Introduction
Before 1 January 2001, South Africa’s income tax system was source-based, taking into account
a few concessions, where residency was not the primary measure used to determine a person’s
taxable income in South Africa. South Africa adopted a residence-based system of taxation on
1 March 2001, resulting in a South African natural person being subject to tax on their worldwide
income (South African Revenue Service (SARS), 2000:1-4).
In South Africa, there are three distinct definitions of residency –
Being a resident of South Africa for immigration purposes, governed by the South African
Department of Home Affairs, in terms of section 25, 26 and 27 of the Immigration Act
(13 of 2002) (South Africa, 2002);
Being a resident of South Africa for exchange control purposes, governed by the definition
set out by the South African Reserve Bank (SARB) currency and exchange manual for
authorised dealers (hereafter referred to as the Exchange Control Manual) (South African
Reserve Bank (SARB), 2019:18); and
Being a resident of South Africa for tax purposes, as set out in section 1 of the Income
Tax Act (58 of 1962) (South Africa, 1962) (hereafter called the Income Tax Act), which
relies on South African domestic legislation as set out in section 1 of the Income Tax Act,
international case law, and the interaction with a Double Taxation Agreement (DTA).
In the tax year ending 29 February 2000, before the change in the tax regime, for a South African
tax resident working abroad the only exemption from income tax available to them in South Africa
was section 10(1)(o) of the Income Tax Act. The section only extended to South African taxpayers
working as officers or crew members of a ship engaged in the international transportation of
passengers or goods or prospecting or mining for minerals (SARS, 2000b). In light of the change
in the tax system – to one of residence based, this section was amended to now also include
South Africans earning income from foreign employment as per the Revenue Laws Amendment
Act (59 of 2000) (South Africa, 2000a).
One of the reasons for the change in the South African tax system mentioned by National
Treasury in a media briefing dated 15 September 2000 was ‘to bring the South African tax system
more in line with international tax principles’. Another was ‘to place the income tax system on a
sounder footing, thereby protecting the South African tax base from exploitation’ (SARS, 2000:1).
1On 22 February 2017, the Minister of Finance, Pravin Gordhan, declared his intention to remove
the foreign employment exemption from the South African tax legislation currently found in section
10(1)(o)(ii) of the Income Tax Act. This change was applied because the exemption was found to
be ‘excessively generous’ (National Treasury, 2017a:138).
1.2 Background to study
As set out in the full budget review published by the National Treasury of the Republic of South
Africa on 20 February 2019, the National Treasury estimated a revenue shortfall of R42.8 billion
in 2018/19 (National Treasury, 2019:35). The Treasury is, therefore, trying to collect additional
revenue from as many sources as possible to make up the shortfall.
Following the announcement in the National Budget in February 2017, there was much discussion
in the expatriate community leading to some misunderstanding and confusion. As per a radio
interview on 702 Talk Radio in August 2018, Jonty Leon, a manager at Financial Emigration stated
after the announcement in the budget to repeal the foreign employment exemption in its entirety;
he had seen an increased surge of South Africans choosing to leave South Africa. Those that
have already left without previously formalising their exit are choosing to return to South Africa to
complete the process in order for them to no longer be South African residents (Leon, 2018).
The definition of a resident in section 1 of the Income Tax Act is a natural person who is ‘ordinarily
resident in the Republic’ or, if not ‘ordinarily resident’, someone who meets the requirements of
the ‘physical presence test’ (South Africa, 1962). The Income Tax Act does not, however, define
the term ‘ordinarily resident’, so one would need to turn to case law in order to establish the
international principles to support the determination as per SARS interpretation note 3 (SARS,
2018a:2).
The physical presence test is a time test, based on the number of days that a person is physically
present in South Africa. When addressing the concept of residency from a domestic tax legislation
point of view, this test will only apply should a taxpayer not be regarded as ordinarily resident in
South Africa during any year of assessment (SARS, 2018b:2). This test becomes important
should a taxpayer break residency in terms of the ordinarily residence test and continue to visit
South Africa after this date.
To align South African tax principles to those used internationally, the definition of resident in the
Income Tax Act also needs to take international tax treaties into account. Double tax treaties may
exclude a taxpayer from being a resident of South Africa based on their facts and circumstances
(Olivier & Honiball, 2011:24).
2The purpose of a double tax treaty/agreement (DTA) is to alleviate tax paid in two countries where
there is a conflict between the taxpayer being resident for tax in both countries or where a taxpayer
is a resident in one, but the source of the income is in another (Olivier & Honiball, 2011:276).
There is a specific Article set out in the DTA between two countries that assists with the
determination of the tax residency status of a taxpayer in each country. To try and maintain a
consistent standard between the various treaties entered into, the Organisation for Economic Co-
operation and Development (OECD) has published their Model Tax Convention (MTC) including
explanatory commentary to assist as a guide (Olivier & Honiball, 2011:268). As per the OECD
MTC and most DTA agreements, the concept of residency is discussed in ‘Article 4’ (OECD,
2017:32). Where a DTA is agreed between two countries, it is vital to study this Article as should
the residency definition be different to that used in domestic legislation, the DTA definition will
apply.
The definition of a resident for exchange control purposes, set out in the Exchange Control
Manual, is a separate definition to that set out in the Income Tax Act (SARB, 2019b:18). In terms
of section B.2 J(i)(b) of the Exchange Control Manual, formalising an emigration via the SARB
requires the applicant to obtain a tax clearance certificate from SARS to confirm their tax
compliance status (SARB, 2019b:73-80). In terms of section 9H of the Income Tax Act, ceasing
to be regarded as a resident of South Africa for tax purposes does not refer to an exchange control
application being a requirement for SARS (South Africa, 1962).
Based on the report-back hearing to the Standing Committee on Finance and Select Committee
on Finance in Parliament, a concession was made to change the existing foreign employment
exemption as an alternative to the complete repeal of this section as initially proposed (National
Treasury, 2017b:6-9). Up until the change in legislation the exemption in section 10(1)(o)(ii) of
the Income Tax Act (58 of 1962) (South Africa, 1962) stated that all remuneration earned by an
individual working outside of South Africa during the period in question would be exempt from tax
in South Africa should all of the following criteria be met:
A taxpayer has to be a South African tax resident;
Receive remuneration for services rendered outside South Africa; and
That taxpayer needs to be outside South Africa for a period exceeding 183 full days in
aggregate during any period of 12-months as well as for a continuous period of more than
60 full days during those 12-months.
The change to section 10(1)(o)(ii) of the Income Tax Act has been promulgated into law as per
sub-paragraph (ii) to be amended for the words preceding items (aa) by section 16(1)(g) of the
Taxation Laws Amendment Act of 2017 (South Africa, 2017). This law will come into operation
3with effect from 1 March 2020, being applicable in respect of years of assessment commencing
on or after that date.
As a result of the change, the same criteria as before need to be met. However, only the first
R 1 million of the remuneration earned during the qualifying 12-month period is exempt from
income tax (South Africa, 1962). The remuneration over R 1 million is subject to South African
income tax as per the tax tables legislated by Treasury, that is as per the progressive tables as
published in Schedule 1 of the Rates and Monetary Amounts and Amendments of Revenue Act
each year (South Africa).
The complication arises when it first needs to be determined whether the taxpayer will remain a
tax resident of South Africa, while the services are being rendered abroad for the exemption to
still apply. This process uses domestic legislation and examination of the DTA where applicable.
The practical implications of verifying the foreign tax credit to be deducted against this income
subsequently need to be investigated. In some cases, the taxpayer will be paying tax in both
countries, and only able to claim relief at a later date (SARS, 2009:1-4).
Since the budget announcement in February 2017 to completely repeal the foreign employment
exemption, it has become abundantly clear that many expatriates who left South African many
years ago are now enquiring about their tax residency status in South Africa. Even though this
foreign employment exemption has been a part of South African tax legislation for many years,
South Africans are only now questioning its application and whether the exemption applies to
them. Some taxpayers, having broken tax residency in South Africa many years ago in terms of
a DTA, are only now wanting to formalise their emigration. As many taxpayers were not aware of
the exit charge due to SARS in terms of section 9H of the Income Tax Act, it may result in
additional tax paid to the SARS (Researcher’s observations based on media coverage and
interaction with public).
1.3 Motivation of the study
One of the main incentives encouraging expatriates to locate to the Arabian Gulf for employment
purposes is the remuneration earned in the Gulf (Baruch & Forstenlechner, 2017). Currently, the
personal income tax rate in the Gulf countries – including Kuwait, Qatar, Saudi Arabia and the
United Arab Emirates is zero per cent (Trade Economics, 2019). This results in the remuneration
earned being tax-free at the source. Although the cost of living in these countries is quite high,
the incentive to work there remains favourable due to the nil tax rate for personal income tax.
As per the International Migration Report 2017 Highlights document published by the United
Nations (UN), international migration numbers have increased faster than the world’s population.
4As per the report, ‘the share of migrants in the total population increased from 2.8 per cent in
2000 to 3.4 per cent in 2017’ (UN, 2017:5).
According to Gerald Seegers, Director of Human Resources at PwC Southern Africa, ‘many
companies are facing the reality that they do not have the right talent in the right places to fulfil
their global growth ambitions’. Some of the reasons include a skills gap in foreign market places
with an ever-changing corporate environment. The younger generation also has a greater
propensity to travel, highlighting the need for more international work opportunities. PwC has
noted that the number of workers who travel to other countries for work opportunities and spend
more than one or two weeks at a time in a foreign country increased to approximately 8% of the
workforce, with the average length of assignment being around 18 months (PwC, 2013).
In some cases, the exodus of skilled professional(s) has become a significant concern, particularly
in the health profession, where the emigration potential increases due to the degradation of the
working and living conditions in South Africa for these professionals (Crush & Pendleton, 2010).
Many South African residents seek employment opportunities outside South Africa, either out of
necessity, to expand their expertise or for the tax benefit of not paying tax in South Africa having
the benefit of the foreign employment exemption. In many cases, they pay little or no tax in the
foreign jurisdiction, and as a result, live a more lavish lifestyle in South Africa while still enjoying
the benefits of the country without paying tax. In some cases, however, the decision to work
abroad is not always to minimize the tax that is paid to SARS, as many expatriates have
permanently relocated to countries outside of South Africa (Researcher’s observations based on
media coverage and interaction with public).
As per an article in the City Press on 17 January 2019, ‘Although neither the Department of Home
Affairs nor the International Relations Department keeps figures on how many people are leaving
the country for good, anecdotal evidence suggests a sharp rise in emigration among South
Africans seeking new lives abroad’ (Zanayriha, 2019). According to this same article, experts
predicted that last year had one of the highest number of emigrations placed on record after a
sudden increase in 2015 when records reflect that more than 25,000 South Africans relocated to
other countries.
As per government notice no 192 published in government gazette 40660 dated 3 March 2017,
SARS has also now agreed to be part of the Automatic Exchange of Financial Information (AEOI),
better known as the Common Reporting Standard (CRS). As per this gazette, financial
information, including income earned in foreign jurisdictions for the period 1 March 2016 to
528 February 2017, must be reported to SARS by that foreign jurisdiction’s revenue authority by
31 May 2017 (SARS, 2017).
As of 24 April 2019, 105 countries have signed the Multilateral Competent Authority Agreement
on AEOI and intended first information exchange date, including South Africa (OECD, 2019).
There will come a time where South African tax residents working for a foreign employer deposit
income into an offshore account located in a tax jurisdiction signed up with CRS. This income will
be reported to SARS, and SARS will become aware of income if not disclosed to them.
As a result of the above, there is often a misunderstanding about the concept of tax residency
and the breaking of tax residency where taxpayers have permanently left South Africa to take up
employment in other countries. It could even be argued that there is a weakness in the South
African personal income tax system, in the monitoring of a person’s tax residency status in light
of taxpayers relocating to other countries for purposes of employment. The current change in
legislation affecting the foreign employment exemption resulted in more South Africans
investigating their residency status and discovering that they have unknowingly already broken
tax residency in terms of a DTA.
1.4 Reference to previous studies
In preparation for this study, two previous studies were reviewed.
1.4.1 Study one
The mini-dissertation of Anne du Plessis was reviewed. Her mini -dissertation was examined in
October 2018 by North-West University (Du Plessis, 2018).
The title of her study was ‘a review of the residency definition for natural persons in the South
African income tax regime’.
Although her study also addresses the issue of residency in South Africa questioned as a result
of the change in the foreign employment exemption legislation, it focuses on the concept of
residency. This study concentrates more on the legislation governing the breaking of tax
residency and the practical issues encountered as a result of no longer being a tax resident in
South Africa and the practical implications thereof.
1.4.2 Study two
The masters thesis of Richard Loyson was reviewed. His dissertation was examined in 2010 by
Nelson Mandela Metropolitan University (Loyson, 2010).
6The title of his study was ‘a critical analysis of the income tax implications of persons ceasing to
be resident of South Africa’.
Although his study also addresses the issue of residency in South Africa, his study addressed the
implications for all taxpayers including persons other than a natural person. His study was also
completed in 2010. The laws surrounding tax residency have been amended since this time and
new legislation has been implemented following this study in relation to ceasing to be a tax
resident. This study concentrates more on the legislation governing the breaking of tax residency,
particularly with reference to the taxpayer who is a natural person which is a different focus to his
study.
1.5 Problem statement
The changes in the foreign employment exemption could result in an increased number of
taxpayers approaching SARS in order to break tax residency in South Africa. From the above the
following problem statement can be formulated: The implications of a natural person breaking tax
residency and the process thereof are complex and must be analysed. The question arises as to
how to interpret the rules surrounding the breaking of tax residency and whether other countries
could provide a better solution.
1.6 Research objectives
1.6.1 Primary objective
This study considers the current meaning of the definition of residency for a natural person
according to the Income Tax Act, and the interaction with the definition of residency for exchange
control purposes and country residency rules. This study will specifically focus on the steps to be
taken where a taxpayer ceases to be tax resident as a result of their relocation to other countries
on a permanent or semi-permanent basis.
1.6.2 Secondary objectives
To critically analyse who is a resident for tax purposes in South Africa, considering South
African income tax legislation, foreign case law interpretation and the application of double
tax agreements (Chapter 2);
To review the impact of breaking tax residency in South Africa and the notion of financial
emigration via a comparison (Chapter 3); and
To conclude and make possible recommendations as to what can be learnt from the
discussion details in Chapter 3 (Chapter 4).
71.7 Research methodology
As part of this study, the research methodology is determined by the ontology and epistemology
of the researcher, which develops the thought process leading to a conclusion.
Ontology comes from two Greek words: on, which means ‘being’, and logia, which
means ‘study’. So ontology is the study of being alive and existing… something we all
ponder at one point or another. When you see the word ontology, think of Hamlet
agonizing over ‘To be, or not to be’ or Descartes stating ‘I think, therefore I am’
(Vocabulary.com, 2019).
Epistemology deals with the starting place of understanding in assessing the opportunities and
limitations of thoughts and ideas (Dudovskiy, 2019a). Before starting to analyse a problem, a
comprehensive understanding of the subject matter as a whole is essential increasing knowledge
of the problem at hand.
Realism research is dependent on the concept of reality from the human psyche. This viewpoint
is grounded on the supposition of an analytical and controlled style in developing awareness and
ideas (Dudovskiy, 2019c).
On the other hand, in terms of the New World Encyclopaedia (2015), relativism is the view where
there is no outright belief in human behaviour. Samples of various behaviours need to be gathered
and observed to determine a true understanding of a collective view or belief.
In studying the area of tax legislation, certain tax concepts are defined in legislation, depending
on the individual inspection of the facts. The interpretation of this legislation can, however, change
the outcome of the final answer as more than one source needs investigation and opinion to reach
a conclusion and avoid a narrow focus. Case law and real-life events may also impact the result.
In particular, when dealing with taxpayers who are natural persons, no two person’s facts and
circumstances may be the same.
Positivism and Interpretivism can be identified as two key aspects of ontology (Dudovskiy, 2019b)
as can be detailed below:
Positivism is grounded on the understanding that whatever happens can be verified through
research, observation, and plausible evidence. Positivists are predominantly realists, usually
considering that scientific development eliminates or dramatically reduce the difficulties
facing mankind (Philosophy Terms, 2018). Positivists conventionally emphasise quantitative
8research, such as surveys in order to determine the social trend and view of society
(Thompson, 2015).
Interpretivists, on the other hand, take the general approach that their research is more
qualitative, using unstructured dialogue or participant observation. Interpretivists believe that
individuals are not mere pawns that respond on command to social influences but are more
accepting and aware of why their behaviour is as it is (Thompson, 2015). Interpretivism is
likely to result in the subjective interpretation of the researcher based on the facts identified
as part of the study, where the hypothesis of the research could still be subject to change
(McKerchar, 2008). ‘Interpretive research does not predefine dependent and independent
variables, but focuses on the complexity of human sense making as the situation emerges’
(Heinz et al., 1999).
The positivist approach is not well suited to this study as this approach takes a narrow line based
on the outcome of plausible quantifiable evidence. It is more suitable for a more interpretive
approach whereby historically promulgated legislation addressing tax residency in South Africa is
questioned to gain a wider perspective of the intention of the legislation.
A taxpayer’s residency status will vary from person to person, depending on their circumstances.
Approaching South African income tax legislation relating to residency from a different
perspective may assist in determining whether the current legislation addressing residency could
improve or whether there are any weaknesses in the current legislation.
This study will analyse the legislation and the changes relating to the definition of residency and
the breaking of tax residency, taking the foreign employment exemption into account.
International clarification will be sought concerning the definition of tax residency, as although this
concept is legislated, it relies heavily on case law and international guidance to support any
conclusions. In order to determine why specific legislation exists and its interpretation, various
views need to be examined to evaluate the consensus and understanding of the idea behind the
implementation.
This study used a doctrinal research methodology. As set out by Terry Hutchinson (2015) in an
article relating to the doctrinal method: ‘legal academic success has been measured within a
doctrinal methodology framework, which includes the tracing of legal precedent and legislative
interpretation. The essential features of doctrinal scholarship involve ‘a critical conceptual
analysis of all relevant legislation and case law to reveal a statement of law relevant to the matter
under investigation.’
9This study follows an inductive process of examining existing legislation and its interpretation and
drawing conclusions based on common observations. A comparison assists in determining
whether there are any shortfalls in the law taking into account and reviewing the relevant DTAs
between South Africa and other countries in the study, as the terms of these agreements vary.
This study seeks to identify similarities between countries with high numbers of taxpayers leaving
their tax system, due to the breaking of tax residency and exiting their domestic tax systems and
the tax treatment thereof. Examining the criteria of breaking tax residency in three countries with
a large number of taxpayers leaving their tax system, could reveal any similarities and ways that
the South African requirements for breaking residency can be improved on from both a tax and
exchange control perspective.
1.8 Chapter overview
1.8.1 Chapter 1: Introduction
Chapter 1 sets out the background to the study, which includes the motivation for the research
on this topic, problem statement, research objectives and methodology.
1.8.2 Chapter 2: The definition of tax residency
Chapter 2 sets out the meaning of tax residency in South Africa with the focus on when a taxpayer
ceases to be tax resident in South Africa and when this is applicable. Chapter 2 will also examine
the international commentary concerning tax residency and the interaction with OECD MTC and
the UN tax treaties.
Chapter 2 will also include a discussion of financial emigration and the distinction between tax
and exchange control residency.
1.8.3 Chapter 3: A comparison
Chapter 3 compares the tax laws in South Africa, India and Russia in relation to their residency
rules, and the treatment when breaking tax residency. Both India and Russia, as well as being
part of the Brazil, Russia, India, China and South Africa (BRICS) countries, have a high level of
migrants leaving the country to seek work elsewhere (UN, 2017). All three countries have
exchange control restrictions concerning cross-border transfers. A brief comparison of the
regulations set out by the respective Reserve Banks will also be looked at as part of this
comparison.
101.8.4 Chapter 4: Summary and conclusions
Chapter 4 will provide any concluding comments concerning this study as well as possible
recommendations for improvements of the system.
The next chapter will now address the definition of tax residency in South Africa in more detail.
11CHAPTER 2: THE DEFINITION OF TAX RESIDENCY
2.1 Introduction
This chapter examines the definition of tax residency in more detail, taking into account the
nuances between income tax and exchange control definitions of residency. It refers to
international commentary and case law dealing with the international interpretation of tax
residency.
With reference to the secondary objectives set out in paragraph 1.6.2 due to a possibility of a
natural person being subject to tax in more than one country, it is also essential to address the
interaction with the DTAs that South Africa has entered into with other countries. The OECD MTC
commentary will play a role when the interpretation of treaties is required, assisting in the specific
meaning of various phrases and words.
2.2 Domestic tax legislation
Before addressing the implications and requirements of ceasing to be a resident of South Africa
for tax purposes, it is essential to explore the definition of tax residency as set out below:
South Africa adopted the ‘residence minus’ system of tax on 1 January 2001 with the result that
residents of South Africa pay tax on their worldwide income (SARS, 2000a:1). The following
definition of a resident was inserted into the South African Income Tax Act with effect from
1 January 2001 by section 2(h) of the Revenue Laws Amendment Act (South Africa, 2000a):
’Resident’ means any –
(a) natural person who is—
(i) ordinarily resident in the Republic; or
(ii) not at any time during the year of assessment ordinarily resident in
the Republic, if such person was physically present in the Republic—
(aa) for a period or periods exceeding 91 days in aggregate during
the relevant year of assessment, as well as for a period or
periods exceeding 91 days in aggregate during each of the
three years of assessment preceding such year of
assessment; and
12(bb) for a period or periods exceeding 549 days in aggregate
during such three preceding years of assessment:
Provided that—
(A) for the purposes of items (aa) and (bb) a day shall include a
part of a day; and
(B) where a person who is a resident in terms of this
subparagraph is physically outside the Republic for a
continuous period of at least 330 full days immediately after
the day on which such person ceases to be physically present
in the Republic, such person shall be deemed not to have
been a resident from the day on which such person so ceased
to be physically present in the Republic.
This early definition did not, however, cater for circumstances where a taxpayer was resident in
South Africa and another country as a result of their residency. A further amendment was added
to the definition of residency with effect from 26 February 2003 by the following insertion to the
definition (South Africa 2003) ‘but does not include any person who is deemed to be exclusively
a resident of another country for purposes of the application of any agreement entered into
between the governments of the Republic and that other country for the avoidance of double
taxation’.
It was, however, recognised by the Treasury in the 2005 National Budget that South Africa had a
scarcity of skills and to encourage the influx of expatriates into South Africa the window of time
used to determine whether a natural person would become resident was extended (National
Treasury, 2005:82). In 2005, section 3(i), the Revenue Laws Second Amendment Act (South
Africa, 2005) then amended the 91 days test explained in (aa) of the definition of a resident to be
applied over five years and not three years. Furthermore, in relation to (bb) of the definition, the
aggregated period over the now five-years changed to 915 days, effectively more than half a year
in each of the five years.
The current definition of resident set out in section 1 of the Income Tax Act about natural persons
reads as follows:
(i) ordinarily resident in the Republic; or
(ii) not at any time during the relevant year of assessment ordinarily resident in
the Republic, if that person was physically present in the Republic—
13(aa) for a period or periods exceeding 91 days in aggregate during the
relevant year of assessment, as well as for a period or periods
exceeding 91 days in aggregate during each of the five years of
assessment preceding such year of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those five
preceding years of assessment, in which case that person will be a resident with effect
from the first day of that relevant year of assessment: Provided that—
(A) a day shall include a part of a day, but shall not include any day that a person
is in transit through the Republic between two places outside the Republic
and that person does not formally enter the Republic through a ‘port of entry’
as contemplated in section 9 (1) of the Immigration Act, 2002 (Act No. 13 of
2002), or at any other place as may be permitted by the Director-General of
the Department of Home Affairs or the Minister of Home Affairs in terms of
that Act; and
(B) where a person who is a resident in terms of this subparagraph is physically
outside the Republic for a continuous period of at least 330 full days
immediately after the day on which such person ceases to be physically
present in the Republic, such person shall be deemed not to have been a
resident from the day on which such person so ceased to be physically
present in the Republic…
but does not include any person who is deemed to be exclusively a resident of another
country for purposes of the application of any agreement entered into between the
governments of the Republic and that other country for the avoidance of double
taxation: Provided that where any person that is a resident ceases to be a resident
during a year of assessment, that person must be regarded as not being a resident
from the day on which that person ceases to be a resident… (South Africa, 1962).
The first residency test as per subsection (i) of the definition above determines whether a person
is ordinarily resident for tax in South Africa. There is no legislated definition of ordinarily resident
in the Income Tax Act and SARS issued guidance by way of interpretation note 3, first published
on 2 February 2001 and last updated on 20 June 2018 (SARS, 2018a).
The determination as to whether a taxpayer meets the requirements of being ordinarily resident
is necessary before the application of the physical presence test set out in subsection (ii) of the
14definition of resident. The physical presence test only applies where a person does not meet the
requirements of being ordinarily resident.
It is critical that the term ‘ordinarily resident’ should also not be misunderstood to be the same as
the meaning of domicile or nationality. Becoming a resident for purposes of Home Affairs rules
and the concept of immigration and emigration for exchange control purposes are also
independent tests (Williams, 2005:11).
More discussion with regards to the above two tests follows below.
2.2.1 The first residency test – being ordinarily resident
In deciding whether a person is ordinarily resident in a particular country, the examination of the
facts unique to each taxpayer having regard to the foundations established in case law is required
(Williams, 2005:11). International and local case law has an important role in assisting with this
determination.
In a prominent residency case heard in the Canadian courts, Thompson v Minister of National
Revenue (Canada, 1946) it was described that a person would be ordinarily resident:
where in the settled routine of his life, he regularly, normally or customarily lives’ or
‘at which he in mind and in fact settles into or maintains or centralises his ordinary
mode of living with its accessories in social relations, interest and conveniences’
(Williams, 2005: 11).
In a 1983 English case Shah v Barnet, the term ‘ordinarily resident’ was described as a place
where ‘a person must be habitually and normally resident... apart from temporary or occasional
absences of long or short duration’ (United Kingdom, 1983).
When considering the ordinarily residence status of a married couple, in ITC 961 (1961) 24 SATC
648, a woman, formerly ordinarily resident in Zimbabwe, married a man in the United Kingdom
(UK) and set up home with him in the UK after their marriage. In this 1961 case, JCR Fieldsend,
said:
I do not think that that mental attitude is sufficient to alter the prima facie position that
on marriage to a man permanently resident in a country, with no intention of leaving
that country, a wife who sets up home with her husband there cannot be said to be
ordinarily resident elsewhere. She has an obligation to live with her husband in the
place he has chosen for the matrimonial home, and it would require very cogent
15evidence to show that despite that obligation the wife in fact retained her pre-marital
residence (Federation of Rhodesia and Nyasaland, 1961:650).
In the case of Cohen v Commissioner for Inland Revenue (South Africa, 1946a:373) the facts
were as follows:
The taxpayer in question was domiciled in South Africa, but during the 1930s and 1940s travelled
extensively on business, spending about half his time in South Africa and the other in Europe and
America. The taxpayer derived his income from director’s fees and salaries from various
companies within South Africa as well as passive income from investments in public companies
located in South Africa.
During the 1940s, he applied for a permit to travel abroad with his family for nine months; this
period extended for a further year after that. It was always the view that the taxpayer and his
family would ultimately return home to South Africa as the taxpayer sub-let the furnished property
that he leased in South Africa for five years.
JA Schreiner in the Cohen case stated:
If, though a man may be ‘resident’ in more than one country at a time, he can only be
‘ordinarily resident’ in one, it would be natural to interpret ‘ordinarily’ by reference to
the country of his most fixed or settled residence… his ordinary residence would be
the country to which he would naturally and as a matter of course return from his
wanderings, as contrasted with other lands it might be called his usual or principal
residence and it would be described more aptly than other countries as his real home
(South Africa, 1946a:371).
RC Williams summarised the decisions of the courts and their understanding of what is ‘ordinarily
resident’ in the following cases:
• As held in the Levene v Inland Revenue Commissioner case – the degree of continuity in
which a taxpayer lives in one place, ignoring the times when the taxpayer may be accidentally
or temporarily absent from this place (Canada, 1928);
• As held in the H v COT case – the place where the taxpayer’s permanent place address is
located and where his/her possessions were kept while he/she was temporarily absent and
where he/she returned to after his/her travels (Southern Rhodesia, 1960);
• As held in the Soldier v COT case - the residence must be established and not seen to be a
semi-permanent or unintended dwelling place (Southern Rhodesia, 1943); and
16• The concept of ‘ordinarily resident’ is more restricted than that of a resident and is a place
where a taxpayer typically resides.
In Commissioner for Inland Revenue v Kuttel JA Goldstone stated (South Africa, 1992a:306):
I can find no reason for not applying their natural and ordinary meaning to the
provisions now under consideration. … I would respectfully adopt the formulation of
Schreiner JA and hold that a person is ‘ordinarily resident’ where he has his usual or
principal residence, i.e. what may be described as his real home.
With international travel and international work opportunities being so readily available, it could
be argued that in some cases, a taxpayer may have a real home available to him anywhere, or
nowhere. Where multi-national corporates allow for some taxpayers to be in a perpetual state of
wandering, the onus of a taxpayer to determine his residency status may not be that clear
(Williams, 2005: 12).
Being physically present in South Africa at all times is not a prerequisite to be regarded as
ordinarily resident. It is the intention of the taxpayer and the indicative steps that the taxpayer
takes to make South Africa his real home that needs addressing (SARS: 2002).
In terms of SARS interpretation note 3, some of the factors that can assist in the determination of
whether a natural person is ‘ordinarily resident’, can be listed as follows:
• Is it the intention of the taxpayer to be ordinarily resident in South Africa?
• Where is the taxpayer’s most fixed and settled place of residence?
• Which place is the taxpayer’s habitual abode, where he/she reside most often – looking
at the taxpayer’s lifestyle and mode of life?
• In which country does the taxpayer have the most business and personal interests and
family ties?
• In which country is the taxpayer employed and where is his/her economic centre?
• What is the taxpayer’s immigration status, in which country does the taxpayer have
permission to reside permanently, and if the taxpayer has a work permit, what are the
conditions of his/her stay in a country?
• Where are the personal belongings of the taxpayer?
• In which country does the taxpayer have nationality?
• Where is the taxpayer’s family and social relations closer – where are his/her friends,
sports and recreational clubs, places of worship?
• Does the taxpayer have political, cultural and other ties?
• What is the frequency of visits to other countries and the purpose thereof?
17Where a person is ordinarily resident in South Africa, but also resident in another country because
of the application of a DTA, the question as to which country that person will is exclusively resident
is discussed further in 2.3 below.
The fact that a natural person has accepted employment outside of South Africa does not
automatically result in him/her being regarded as a non-resident for tax purposes. In some cases,
when temporarily abroad, carrying out a two-year employment assignment, the taxpayer
maintains his/her property in South Africa with the majority of his economic investments and family
connections still in South Africa. In terms of the ordinarily residence test, he/she is likely to remain
a resident of South Africa.
In a recent Australian case, Harding v Commissioner of Taxation (Australia, 2018), a taxpayer
was found to be a resident of Australia, even though mostly absent from Australia working abroad
between the period of 2006 and 2018. In terms of Australian tax legislation, to be a tax resident
in Australia, the ordinary concept and domicile tests must be met, similar to our ordinarily resident
test.
In this case, the taxpayer was an aircraft engineer working in the Middle East. His wife and
children who originally accompanied him to Saudi Arabia returned to Australia in 2004 due to the
unrest of the Middle East, where they remained, and his children completed school. The taxpayer,
although receiving a permanent employment post in Bahrain in 2009, moved around to various
bases as part of his employment. The taxpayer returned to Australia from time to time on vacation,
where it was held that he maintained a residence. The taxpayer argued that the property was
merely a temporary home for his wife and children to live in until his son finished school. The
courts found, however, that as a result of the permanent abode in Australia and that fact that he
could move freely around the Middle East as part of his employment, Australia was his actual
place of residence (Cliffe Dekker Hofmeyr 2018).
Taken on appeal to the Federal Court of Australia, the judgement dated 22 February 2019 for this
case overturned the above decision and found that that the taxpayer was not a resident of
Australia. It was held by the honourable Logan, Davies and Steward that the Commissioner had
made his decision based on the taxpayer’s financial ties in Australia, including his property and
investments. It was, however, concluded in Harding v Commissioner of Taxation (Australia, 2019),
that these and other factors were not sufficient to conclude that the taxpayer was still a resident
of Australia when the taxpayer intended to leave Australia indefinitely and not to return. It was
held that:
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