National Treasury’s latest published Draft Tax Bills incorporated the contentious additional ‘exit tax’, which proposed taxing the retirement fund interests of individuals when they cease South African tax residency. Various expatriates and stakeholders opposed the draft bill during virtual parliamentary sessions in August.
However, we have not heard anything back from Treasury, which is concerning because we are mere months away from the proposed March 1, 2022 deadline.
The South African Revenue Service (Sars) has made it clear that it is ready to play hard ball with tax evaders. The introduction of new laws and specialised departments/units within Sars shows its dedication to addressing the widening gap within the country’s tax net.
A spate of recent legislative changes indicate that the spotlight is sharply focused on expats:
- Section 10(1)(o)(ii) (the foreign employment exemption) was capped at R1.25 million effective from March 1, 2020.
- In dealing with non-compliance, the word ‘wilfully’ was eliminated from the Tax Administration Act, which offers Sars more clout in prosecuting taxpayers who claim negligence for failing to honour their tax responsibilities.
- Phasing out of formal emigration through the South African Reserve Bank (Sarb).
- The introduction of the three-year ‘lock-up’ rule in respect of withdrawal/encashment of retirement vehicles from March 1, 2021.
- Guidelines issued on Sars’s website in July 2021 on the process to follow in declaring oneself to be a non-tax resident.
- The proposed ‘exit tax’ on retirement funds/vehicles from March 1, 2022.
The changes in the laws for expats clearly indicates Sars’s intent to reap its share of foreign income.
The impracticality of these changes
From a practical point of view, the actioning of Sars’s newly acquired firepower has not only left the general taxpayer in a confused state but has caused a lot of frustration. By phasing out the Sarb process of formal emigration, expatriates are now subjected to audits by Sars to establish their status as non-residents and to further justify their intentions.
Furthermore, the proposed exit charge on retirement funds presents a bit of a conundrum.
It contradicts the three-year lock-up rule, which legally restricts non-residents from encashing or withdrawing their retirement funds until they can prove their non-residency for three consecutive years. A Tax Compliance Status (TCS) pin is required as part of the new financial emigration process to cease tax residency with Sars and successfully encash any retirement funds. However, the three-year lock-up rule renders the TCS pin redundant, as it expires after 12 months with no procedure currently in place to reactivate or regenerate it.
Submissions to oppose this proposed law have been met with silence.
With the deadline for implementation looming, taxpayers are wondering what Sars is up to.
How will Sars find me?
Sars has previously gone into hibernation, only to bounce back with renewed vigour in its pursuit of taxation on foreign earned income. During these uncertain times, a common question raised by expats is ‘How will Sars ever find me?’.
This brazen and ill-informed outlook on tax compliance quickly dissipates the moment Sars furnishes its now infamous ‘Offshore assets and foreign revenue streams’ audit. We are clearly not dealing with the Sars of old. This is further attributed to the restructuring of its divisions as well as the automatic exchange of information between jurisdictions.
Sars recently formed a Foreign Employment Unit and introduced a High Wealth Individual (HWI) segment, a specialised investigative unit with a R3 billion budget. Audits of high-net-worth individuals have become commonplace for the new unit.
These include lifestyle audits or even probes of social media posts. Any discrepancies found during the audits may lead to criminal prosecution under Section 234 of the Tax Administration Act, 2011, as amended by section 35 of the Tax Administration Laws Amendment Act, 2020.
While the parameters of tax non-compliance have become a point of contention, expats must be aware of the realities of tax administration, and not forget that the onus remains on them to remain tax compliant. Rather than to potentially or unintentionally subject themselves to criminal prosecution, they must take deliberate and careful steps to attend to their tax affairs and seek to conduct a tax diagnostic under the guidance of a provider with a strong tax and legal component.
The authors are from Tax Consulting SA – Victoria Lancefield is GM for financial emigration, and Sthembile Mkhize and Deshika Padayachy are expatriate tax specialists.