SARS is shifting its approach when going after these taxpayers
The number of South Africans earning income abroad has been on the rise, piquing interest from the South African Revenue Service (SARS), says Victoria Lancefield, general manager at Tax Consulting SA and Khutso Makgoka, legal consultant at the company.
SARS has adopted a new method of investigation into expats, who use residency-based tax systems to emigrate and earn an income abroad. To SARS, these expats are often soft targets as they misunderstand their certain tax obligations.
Tax Consulting SA said that the misunderstanding of South Africa’s tax residency rules has resulted in more tax non-compliance by expat taxpayers in that they incorrectly declare their income to SARS – or not at all.
As a result, SARS has adopted a new approach to deep dive into the disclosing of foreign income made – or not made – by resident and non-resident taxpayers alike.
Tax Consulting SA uncovered a recent example of in-depth inquiries into foreign income disclosure following a recent application by a tax non-resident for a formal letter from SARS confirming their non-resident status.
Recent queries uncovered by Tax Consulting SA show that deep dives can look something like this:
Queries posed to a husband as part of an investigation into a spousal couple’s income:
“As per information available to me, you resigned from SA employment on 2017-10-16, and you ceased to be resident on 20202-09021. With supporting documents, state the source of income for the period 2017-10-17 to 2020-09-21…
…When did you start your overseas employment? As a resident, you are taxed on worldwide income. Submit a letter from your current employer confirming the date when your employment started. If necessary, submit the details of the income and state why it was not declared.”
What SARS asked the wife:
“Submit details of your income situation since you last submitted an SA income tax return. When did you take foreign employment, and why was it not declared.”
These types of messages, according to Tax Consulting SA, clearly show that SARS is not letting any detail go unnoticed.
“The period referred to in the above example relates to the time period between the applicant’s last known South African employment and the date on which they ceased to be tax residents in South Africa,” added the group.
Tax Consulting SA said that these deeper enquiries on foreign income are important in that they highlight the following:
- If a taxpayer earned any income during that period, it needs to have been declared – as they were still tax residents in South Africa- i.e. regardless of whether it was local or foreign income.
- If the taxpayer did not earn any income from any sources worldwide or they were unemployed during a relevant tax period, it is also prudent to also declare this to SARS, even if just for audit trail purposes.
“In this particular case, if the taxpayer had erroneously not declared their foreign income to SARS, they may be liable for outstanding tax and potential non-compliance penalties and interest on the outstanding amount,” said the tax consultants.
“Their tax residency status may fall into question, and they may not be awarded a non-resident confirmation letter by SARS until all non-compliance is corrected and any funds due to SARS are paid.”
With SARS becoming more inquisitive, assessing each individual’s financial affairs and examining each case on its merits, it is best for consumers to be aware of recent trends and what they must comply with, said Tax Consulting SA.
Definition of tax resident
Under the Income Tax Act of 1962, people are tax residents if they fulfil one of the residence tests.
SARS initially considers whether the taxpayer meets the requirements of an original resident based on their intention. Under this test, an individual who intends to live in South Africa permanently is seen as a tax resident.
“Alternatively, if the taxpayer is already on-record with SARS as a non-resident, they may become a resident by being physically present in South Africa for a specific period of time.”
What qualifies as foreign income
According to Tax Consulting SA, the location where services are rendered will generally determine whether they are considered to be from a South African source or are otherwise foreign.
Foreign income is not based on where you are employed or based on where payment is made but where you render services.
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