Tax emigration: Definitions of resident and non-resident are ‘misaligned’

Creating complexity and uncertainty.
The formal emigration process through the Reserve Bank was scrapped without National Treasury fully understanding the consequences, says a specialist in the field. Image: AdobeStock

The formal emigration process has died a quick death, but the consequent changes have brought with them increased costs, complexities and uncertainties.

The main concern is that the definitions of a resident and non-resident in the different acts, governed by National Treasury as the policy maker, do not align with each other.

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According to Hugo van Zyl, tax and exchange control specialist, the South African Reserve Bank (Sarb) abdicated the formal emigration process to the South African Revenue Service (Sars).

The tax emigration process became the only option on 1 March 2021. Although it was said to be “phased out” it happened “overnight”, he said at a recent webinar hosted by The Tax Faculty.

Different acts

Van Zyl says the different acts that do not talk to each other on the definition of resident and non-resident include the Estate Duty Act, the Income Tax Act and the Tax Administration Act, as well as the Authorised Dealer Manual issued in terms of the Banks Act.

He cites several examples of the confusion caused by this misalignment when it comes to tax non-residency and exchange control non-residency.

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In terms of the Sarb rules in the Authorised Dealer (banks) Manual the definition of an exchange control non-resident is an individual or natural person whose normal place of residence, domicile or registration is outside of South Africa.

However, this ignores the fact that an individual can be tax non-resident because of the tie-breaker rules in a Double Tax Agreement, despite retaining SA as their normal place of residency. The South African resident is temporarily resident in a foreign country (for example for work purposes) and their SA income tax resident status is subject to the treaty rules.

Van Zyl explains that if someone is tax non-resident in SA because of a tax treaty, the person is not exempt from South African estate duty in terms of their world-wide assets.

If tax non-residency results in exchange control (excon) non-residency, the non-resident does not have to report their offshore assets to the banks in SA and there is no tax on the assets because they are not SA assets, but the assets must be reported for estate duty even though there are no remaining assets administered by a South African executor.

Incorrect approach

Van Zyl also explains that a green bar-coded identity document or smart ID card is assumed to prove excon residency when people want to move money in or out of SA.

The problem comes in when someone who was born in the US and has never set foot in SA, but has a green bar-coded ID, wants to move money in or out of SA.

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The way Authorised Dealers interpret the manual, this person is considered an SA exchange control resident, purely because of the SA ID, and in order to move their money they are forced to be registered with Sars in order to obtain a Tax Clearance Certificate (TCS) or Tax-Exemption Certificate (TEC) pin number.

“This is not the correct approach,” he adds.

Someone who formally emigrated in 1999 and was not subject to the world-wide tax legislation or capital gains tax in SA does not have a TCS. If they want to take out SA funds, like a past inheritance, they are forced to reactivate their Sars tax number in order to obtain a TEC.

“We are now forcing people back into the system that do not belong there,” says Van Zyl.

Potential abuse

He also warns that because of this misalignment of definitions and requirements as well as the lack of clarity there are cases of abuse with the remittance of the single discretionary allowances where individuals (who are tax non-resident) should not have been allowed to take out R1 million per annum.

The banks allow the remittance based on the ID and tax number, whereas if they checked the tax residency status (or had access to a central register) the transfer would clearly not have been allowed.

Exchange control 

Most exchange control advisors agree that the new emigration process is far more complex and more uncertain. Van Zyl says although exchange control measures have been eased, the compliance and cost factors have doubled.

“I want us to start with the root causes. The changes have not been double-checked to ensure [that] policy application and interpretation throughout all the various agencies are one and the same,” he says.

The formal emigration process through the Reserve Bank was scrapped without National Treasury fully understanding the consequences – and Sars, probably unfairly, must catch all the problems, says Van Zyl.

It is time for National Treasury to take ownership of the problem where we have various tax and bank acts that refer to each other, but do not speak to each other in terms of the relevant residency definitions, he says.

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