Understanding your tax residency when returning to South Africa
For South Africans returning home, one of the biggest tax mistakes is assuming that becoming tax resident again simply happens when you arrive back in the country. The date you return, income you receive around that time and your offshore assets can all affect your tax position.
Moving back from the UK, UAE, Australia or elsewhere can change your tax residency status and how your worldwide income and assets are treated.
Ideally, start planning six to 12 months before you return. This gives you time to establish your tax residency position, review your offshore wealth and address any potential issues before you become tax resident in South Africa.
What happens to your tax residency when you return to South Africa?
Before you make the move home, it is worth establishing where you stand with SARS. If you have an active South African tax number, check that you properly ceased to be a South African tax resident when you left.
If SARS still considers you tax resident for the period you were living abroad, you could potentially face South African tax on foreign income earned during that time.
If you do not have an active South African tax number, make sure you have evidence showing that you were not a South African tax resident before returning. A Tax Residence Certificate from the country where you were tax resident can provide evidence of your status and help establish when your South African tax residency began.
This documentation can be valuable if SARS later questions your historic residency. Without it, you may have to reconstruct your tax history and establish when your South African tax residency began.
Your previous tax residency status can also be relevant when determining how your offshore assets and their base costs are treated when you become South African tax resident.
When do you become a South African tax resident again?
The date on which you become South African tax resident can affect the tax treatment of income, capital gains and other transactions around your move.
A cross-border transition can involve four overlapping tax positions:
The country you are leaving while you are tax resident there
The country you are leaving after you cease to be tax resident
South Africa before you become tax resident
South Africa after you become tax resident
These are not four separate tax bills. They are four periods that need to be considered when determining which country's rules apply.
Domestic tax rules and, where relevant, a double taxation agreement can further affect which country has taxing rights. This is why advice should cover both sides of the move. You need to understand not only where you are going, but what you are leaving behind.
There are two tests for South African tax residency:
Ordinarily resident test: This looks at whether South Africa is your real or permanent home and where you naturally return.
Physical presence test: You may become resident if you meet specific day count requirements over the current and previous five tax years.
If you are considered tax resident in both South Africa and another country, a double taxation agreement may determine where you are treated as resident for treaty purposes.
Knowing which test applies to you, when your residency begins and whether a tax treaty affects your position is important, as it can directly affect your tax immigration and how your worldwide income and assets are treated.
How is foreign income taxed when you return to South Africa?
For South African expats, timing can be particularly important when income is due around the move.
Consider someone leaving the UAE with a substantial employment bonus. It’s easy to assume the tax question comes down to when the money lands in their bank account. But it can be more complicated. When the bonus was earned, what their employment agreement says and when they became entitled to it can all affect the tax treatment.
The same applies to dividends, rental income, business income and investment gains. You need to understand when the income accrues and which country has taxing rights at that point.
The goal is to make sure the paperwork matches what is actually happening and that the income is recognised at the right point in the move. Once a transaction has taken place, you cannot simply go back and change when it happened.
What happens to your offshore investments when you return?
Returning South Africans may have built up shares, property, pensions, bank accounts and other investments while abroad.
One important consideration is the base cost of those assets for future South African tax purposes. Keeping clear records of what you owned and its relevant value when you become tax resident can make future Capital Gains Tax calculations much easier.
In some circumstances, it may be appropriate to sell and repurchase a share portfolio shortly after becoming South African tax resident. This can create a clear, documented base cost and avoid having to reconstruct the history of individual investments years later.
However, this is not a blanket recommendation. Selling and repurchasing assets can have tax, transaction cost and investment implications, so the approach should be considered as part of your wider planning.
Can you restructure your wealth before becoming a South African tax resident?
There can sometimes be a period between ceasing tax residency in one country and becoming tax resident in South Africa. Depending on the circumstances, this gap can provide valuable time to review and restructure your wealth before South African tax residency begins.
For someone leaving the UK, this could include reviewing investments, trusts, companies or other structures. However, the UK has a temporary non-residence “tail”, which can bring certain gains back into the UK tax net if you return within the relevant period. Restructuring your wealth during this window therefore needs to take your potential return to the UK into account.
You cannot create this window simply by choosing a return date. Your tax residency depends on the rules of the countries involved and, where relevant, the applicable tax treaty.
If a window does exist, it is important to understand what you can do during it and the tax consequences of returning to your former country of residence too soon.
How should you review your offshore wealth before returning to South Africa?
A trust, company, investment structure or loan arrangement that made sense while you were living abroad may have different tax consequences once you become South African tax resident.
In one case, we assisted a South African returning from the UK who found himself in the unusual position of being non-resident in both countries for a short period. Because he sought advice early, there was time to establish an offshore discretionary trust and review his investments, loans and company structures before his South African tax residency began.
The planning also included reviewing asset base costs and considering gifts to non-resident family members, offshore loans, companies and investment products.
Not every returning South African needs these structures, but it’s important to be aware that timing can create options that may no longer be available once South African tax residency begins.
How should you plan your South African tax affairs before returning?
The best time to review your tax position is before you leave your current country, not after you arrive in South Africa.
Starting six to 12 months ahead gives you time to confirm your residency status, gather evidence of your previous tax position, review offshore assets and structures, and consider the timing of income and reporting across both countries.
For South Africans returning from the UK, UAE, Australia or elsewhere, the aim is not simply to minimise tax. It is to understand where and when you may be taxed and how your existing wealth will be treated once you return home.
With the right advice, you can identify potential issues early, consider your options and avoid unnecessary complications.
Moving home? Don't wait until you are back in South Africa to review your tax position.
Your residency date, income and offshore wealth can all have tax consequences. Getting advice early gives you more time to plan before decisions become difficult to change.
Speak to one of Sable International’s cross-border tax specialists today. Email us at taxsa@sableinternational.com or call +27 (0) 21 657 1517 to get started.