Now that South Africa has a residence-based system of income tax, a decision by a non-resident to become tax-resident in South Africa has the result that his world-wide income will become subject to tax in South Africa, save to the extent that relief is given by a double-tax agreement or that unilateral relief is available in terms of section 6 quat of the Income Tax Act 58 of 1962. It is therefore not a decision to be taken lightly.
Binding Private Ruling 153, issued on 30 August 2013, concerned the residency status of a particular non-resident natural person who intended applying for a temporary residence permit in the Republic and gives a ruling on whether the application for such a permit would result in the person’s becoming ordinarily resident for South African tax purposes.
The Ruling records that the applicant was currently resident in a foreign country, had recently retired and –
‘has been spending time in South Africa on extended visits. The Applicant is contemplating retiring to South Africa and intends applying to the Department of Home Affairs for temporary residence in the form of a retired person’s permit.’
The Ruling commences by stating that it was issued subject to the condition and assumption that the applicant is not a resident as defined in section 1(1).
The content of the Ruling
The text of the ruling is expressed in ostensibly innocuous terms, but illustrates how important it is that a taxpayer in this situation obtains professional advice as to the exact meaning and limitations of such a Ruling. The “assumption”, as noted above, on the basis of which the Ruling was given, is presumably intended to connote that the Ruling assumes (and thus does not itself guarantee) that the applicant is not already a resident as a consequence of his spending more than the statutorily defined number of days in the Republic during the current tax year and the preceding five tax years.
Since the background facts, as stated in the Ruling, are that the applicant ‘has been spending time in South Africa on extended visits’, it is entirely conceivable that he may, indeed, already be tax-resident in the Republic by virtue of the physical presence criteria set out in the definition of resident in section 1 of the Act.
The Ruling goes on to declare that –
‘An application for a retired person’s permit will not, in itself, be sufficient for the Applicant to become ordinarily resident in South Africa provided the Applicant does not indicate to the Department of Home Affairs on the relevant application form(s) that the intention is to settle in South Africa on a permanent basis’ and that –
‘This binding private ruling is valid for the year of assessment in which the proposed transaction is executed.’
The weasel words in the Ruling
The weasel words in the former quotation are will not in itself be sufficient. The applicant is left to infer, if he is sufficiently alert to the occult garb of lawyer-speak, that the fact of applying for a temporary residence permit may in combination with other facts and circumstances be a material consideration in determining whether he will become tax-resident in South Africa by virtue of his making such an application. Even that qualified assurance by SARS is diluted by the surprising rider that the Ruling is valid only for the tax year in which the taxpayer makes the application for temporary residence. In other words, SARS reserves the right to argue the exact opposite of its Ruling as soon as the new tax year dawns.
SARS is of course not in the business of giving tax-planning advice to taxpayers, and is under no legal obligation (let us not pretend that moral obligations exist in the tax universe) to alert taxpayers to possible pitfalls in their proposed course of conduct.
The sub-text of the Ruling and the tax-planning implications
If this particular applicant is wise, he will ask a tax practitioner to lay bare the hidden landmines in SARS’s legalistic Ruling, in which event he may receive a rather more chilling message, along the following lines:
If you are already, as you say, “spending time in South Africa on extended visits” then you need to make a careful count of the number of days you have been and intend to be physically present in South Africa in each tax year, and ask an expert tax adviser to work out whether you are already (or are in danger of becoming) a tax-resident in South Africa. Even if that day-count is on the safe side of the statutory thresholds, if it is part of the settled routine of your life to come to South Africa for extended visits, SARS may argue, on the basis of various judicial decisions, that South Africa is already your “real home to which you return from your wanderings” and that you are already “ordinarily resident” in South Africa. And if your plans to retire to South Africa come to fruition, you will then definitely be tax-resident in South Africa on the basis that you are now, without doubt, “ordinarily resident” in this country. But there are various legal means in which you can arrange your affairs, prior to taking up residence in South Africa, to avoid or reduce liability to South African income and capital gains tax on your foreign assets – and for advice in this regard you should consult a tax practitioner without delay.