Is it compulsory to cease South African tax residency? The short answer is no, emigrating taxpayers are not legally compelled to cease South African tax residency.

However, it is strongly advised that anyone permanently leaving the country actively seeks relief from their local tax obligations. This is the only way to protect their foreign income and wealth from future taxation by SARS.

If you don’t know what tax residency is or why you should cease South African tax residency, please read on. It could save you a lot of effort and money in your new home country.

Why should you cease South African tax residency?

From 1 March 2000, South Africa moved from a source-based tax system to a residency-based tax system. Under the previous legislation, native South Africans paid income tax on their locally earned income only. However, under the new laws, they are now taxed on their entire worldwide income and must pay capital gains tax even on the sale of their foreign property. This is regardless of whether they live in South Africa or somewhere else in the world.

This is why it is so important to cease South African tax residency after moving abroad. Many South Africans live in another country for an extended period due to a work assignment, to experience the culture of another country for a time, or many other reasons. The courts have ruled that in these situations, where their return to South Africa is inevitable, they will be treated as resident taxpayers of South Africa and must continue to meet their tax obligations.

The only way to completely stop paying tax to SARS is to formally cease South African tax residency. This means the taxpayer must prove that their return is not inevitable by providing documented evidence to SARS that they intend to remain outside the country permanently.

If SARS accepts this evidence, it will flag that individual as non-resident on its taxpayer database. At that point, they will no longer have to submit annual returns to SARS declaring their worldwide earnings for the year or reveal their entire portfolio of foreign assets.

Of course, if they have any sources of income in South Africa or sell any assets they retain here, this income or capital gains will be subject to taxation. So, although the taxpayer did cease South African tax residency, they will still have to submit tax returns for any earnings in the current tax year.

What happens if you don’t cease South African tax residency?

By default, you would have to pay tax to both SARS and the tax authority in your new jurisdiction. Recognising the challenge this poses to a taxpayer’s finances, governments often enter into a double tax agreement (DTA) with one another to ensure tax is ultimately collected by only one of them.

But DTAs tend to differ between jurisdictions. Some may dictate that the taxpayer only pays tax in one of the countries and another may allow either authority to collect tax based on predefined circumstances. So, although DTAs offer some protection, one does not truly cease South African tax residency through them.

However, in some cases, you may not qualify to cease South African tax residency and a DTA then becomes a critical safety net against double taxation.

Other consequences include:

• If there is no DTA between South Africa and your region, you will pay double tax
• If a DTA exists, you still have to prove objectively to SARS that you qualify for its protection
• You may face unfavourable DTA terms over which you have no control or say
• You may need to continue to make annual submissions to SARS, as well as other submissions for which you qualify, such as biannual provisional tax
• SARS may provide you with tax credits based on what you have already paid to your local authority, but you may still pay tax that is not collected locally
• Back taxes owed to SARS may be collected through the tax authority in your region and you could be approached by local law enforcement because of unresolved tax matters
• You will pay CGT on foreign assets you dispose of, windfalls you enjoy, or any other fortunes that come your way. In a region that doesn’t have CGT, this can be a frustrating loss
• Even when you pass on, SARS may still claim a stake in your estate, regardless of how lenient local tax collection is, leaving your family with less

But, when you cease South African tax residency, these and any other tax obligations – except those on South African sourced income and gains – basically disappear.

The need to cease South African tax residency

It may not be legally compulsory to cease South African tax residency but good sense certainly compels any emigrating taxpayer to pursue it as if it were.

Only having to deal with one tax authority, especially in a jurisdiction where tax laws are less burdensome, will ensure your life abroad is more enjoyable than ever.