Government ties up tax loophole in South Africa

Tax experts say that ever-changing laws for expatriates will continue to impact those who have not formalised non-residency with the South African Revenue Service (SARS).

Tax law practitioners Jonty Leon and Reinert van Rensburg from Leap Group said that over the past few years, there has been a continual and concerted effort to target South Africans living abroad through changing employment exemptions or clamping down on those who fail to declare foreign incomes.

After ceasing tax residence, a taxpayer has two years of assessment 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.”

This creates a loophole regarding annual exemptions and exclusions because these non-residents will have access to the same amount of exclusion twice a year, said Leap Group.

During the latest national budget speech, finance minister Enoch Godongwana addressed a loophole regarding tax residency by apportioning the interest exemption and capital gains tax exclusion, said the tax experts.

The government, however, did not consider the effect these changes would have on contributions made to retirement funds or tax-free investments in South Africa, Leap Group said.

“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 limit this inconsistency, the finance minister proposed in his budget that the contribution limit of tax-free investments and retirement funds contributions deduction limit be apportioned over the two years of assessment created by ceasing tax residence.

The maximum amount of R36,000 that can be contributed towards a tax-free savings account during a year of assessment will be apportioned over the two years of assessment during the 12-month period in which an individual ceases to be a tax resident in South Africa, Leap Group said.

The maximum deduction of retirement funds contributions of R350,000 will also be apportioned over the two years of assessment created by ceasing an individual’s tax residence.

Although these proposed changes do not, in effect, have an immense negative impact on individuals ceasing to be residents, only rectify the inconsistency of the Income Tax Act against its own rationale, it does remove the loophole that was available for taxpayers who ceased to be residents in recent years, said Leap Group.

It also emphasises the government’s continuous focus on South Africans leaving the country and that the tax laws can be amended and impact expatriates during any year of assessment.

According to Tax Consulting SA, SARS has demonstrated that it is casting an eye to greener pastures, being the South African expatriate community abroad.

“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 proposals alluded to include steps providing for closer scrutiny and possible taxation of offshore structures, including foreign trusts with South African beneficiaries.

As a result, Leap Group said that South Africans who are living abroad on a permanent basis are urged to formally note their change of tax residence with SARS to remove themselves from the ever-changing expatriate tax law.

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