Many seem to be surprised by comments in the 2020 Budget Review documents released on 26 February 2020 to the effect that financial emigration status and tax residency status are not synonymous. There also seems to be confusion about the impact on a person’s tax residency status if, as mentioned in the 2020 Budget, the financial emigration process is phased out.
The reason for the surprise and confusion appears to be the belief that financial emigration automatically results in and is directly connected to a change in tax residency status from resident to non-resident. Nothing could be further from the truth! In fact, many who have followed the process of financial emigration (fueled in many cases by the so-called “expat tax”) may very well discover that their tax residency status has remained, unchanged. If, in these cases, the emigration process was solely motivated by an apparent automatic change in tax residency status, then the financial emigration process may have been a complete waste of time and money.
It is strange that this misunderstanding arose in the first place. After all, when the change in the “expat tax” was first announced in 2017, National Treasury, in an official response document published in final form on 15 December 2017 replied to a comment as follows:
“Comment: This proposal will lead to an acceleration of formal emigration from South Africa or to South Africans giving up their passports. While the capital gains tax exit 8 charge might result in a short run revenue gain, the loss in future revenue and remittances would be greater.”
“Response: Not accepted. The proposal is not related to citizenship and should not lead to South Africans giving up their passports as the application rests solely on tax residency. Individuals who give up their passports may find they are still tax resident in South Africa and may still be liable for South African tax.”
In addition, the true test for tax residency was already formulated some 74 years ago, and is succinctly summarised in SARS’ Interpretation Note 3. This note has been in circulation for at least the last 18 years. It has long since been the case that financial emigration is simply one factor in establishing a person’s tax residency status. This was, once again confirmed by SARS in October 2019 in FAQ document, where it is stated:
“How does financial emigration impact my tax residence? Acquiring approval from the South African Reserve Bank to emigrate from a financial perspective is not connected to an individual’s tax residence. Financial emigration is merely one factor that may be taken into account to determine whether an individual broke his or her tax residence. An individual’s tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether an individual ceased to be ordinarily resident in the Republic.”
It is also worth noting that financial emigration is a South African Reserve Bank (SARB) process. There is no such thing in tax law as “tax emigration” or ‘financial emigration for tax purposes’ per se and there is no formal ‘SARS emigration process’ of declaring yourself tax non-resident (apart from simply ticking a box on the tax return in which you declare yourself non-resident, or when applying for a tax clearance on emigration through SARB, noting an intention to cease tax residency, as confirmed by SARS in its FAQ on this topic- see question 20). These terms artificially blur the lines between SARB rules and processes and the tax rules for residency.
Those who consider themselves non-resident for tax purposes purely because they have gone through a SARB process of financial emigration would, in many cases, do well to revisit the question of tax residency. Arguably the best starting place for this is to read through SARS’ Interpretation Note 3, which you can access here. Failing to submit a tax return or submitting a tax return where you incorrectly declare yourself as a non-resident may constitute a criminal offence and could expose you to serious consequences.
Regarding the proposed phase-out of the financial emigration process (via SARB) and the impact thereof on tax residency – suffice it to say that this will have little or no impact on the issue of tax residency status. It has never really had much of an impact on its own in any event.
So, has the proverbial cat been let out of the bag with the announcements in the 2020 Budget? For some, perhaps. The correct tests for tax residency are well established in law and should have been known. Arguably then, the proverbial cat was never really in the bag to begin with.