South Africa's government has closed a tax loophole

According to tax experts, the ever-changing legislation for expats will continue to affect individuals who have not registered for non-residency with the South African Revenue Service (SARS).

According to tax law practitioners Jonty Leon and Reinert van Rensburg of Leap Group, there has been a consistent and deliberate effort over the past several years to target South Africans residing overseas by modifying employment exemptions or cracking down on individuals who fail to disclose foreign income.

A taxpayer gets two years of assessment after quitting tax residency during the 12-month period of the tax year in which they become a non-resident.

“The reason for this is that their year of assessment is considered to have come to an end on the day before their tax residence ceased, and their next succeeding year of assessment will start on the very next day.”

According to Leap Group, this presents a loophole in terms of yearly exemptions and exclusions because these non-residents will have access to the same amount of exclusion twice a year.

According to tax experts, during the most recent national budget speech, finance minister Enoch Godongwana corrected a tax residency gap by apportioning the interest exemption and capital gains tax exclusion.

According to Leap Group, the government did not evaluate the impact of these changes on donations to retirement plans or tax-free investments in South Africa.

“Due to the two years of assessments, a taxpayer who ceases to be a resident can contribute up to R72,000 towards a tax-free investment and deduct up to R700,000 pension funds contributions made over the 12-month period of the tax year they cease to be a resident.”

“However, this is if the provisions of the Income Tax Act are theoretically strictly applied, and not necessarily the case practically – because at the end of the day, only one return is submitted, and one assessment is raised.”

To address this contradiction, the finance minister recommended in his budget that the contribution maximum for tax-free investments and the deduction limit for retirement fund contributions be divided across the two years of assessment produced by discontinuing tax residency.

According to Leap Group, the maximum amount that can be deposited to a tax-free savings account during a year of assessment will be allocated over the two years of assessment during the 12-month period in which an individual ceases to be a tax resident in South Africa.

The maximum deduction for retirement fund contributions of R350,000 will likewise be allocated over the two years of assessment produced by an individual ceasing to be a tax resident.

Although the proposed changes do not have a significant negative impact on individuals who cease to be residents and only correct the Income Tax Act’s inconsistency with its own rationale, they do close a loophole that was previously available to taxpayers who ceased to be residents, according to Leap Group.

It also emphasises the government’s ongoing focus on South Africans leaving the country, as well as the fact that tax regulations can be modified and effect expatriates at any time during the fiscal year.

According to Tax Consultancy SA, SARS has shown that it is looking for greener pastures, specifically the South African expatriate community overseas.

“An apportionment limitation to both the annual interest exemption and capital gains tax exemption was introduced. These limitations directly target South Africans engaged in the process of ceasing their tax residency,” it said.

Future legislative suggestions have hinted at increased scrutiny and even taxation of offshore entities, such as foreign trusts with South African beneficiaries.

As a result, Leap Group advised South Africans residing overseas on a permanent basis to formally notify SARS of their change of tax residency in order to be exempt from the ever-changing expatriate tax rules.