The latest tax bills published by the National Treasury incorporated the controversial additional ‘exit tax’, which proposed to tax the interests of people’s retirement fund when they cease tax residence in South Africa. Several expats and stakeholders opposed the bill during virtual parliamentary sessions in August.
However, we have not heard anything from the Treasury, which is concerning because we are only a few months away from the proposed deadline of March 1, 2022.
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The South African Tax Service (Sars) has made it clear that it is ready to play tough on tax evaders. The introduction of new laws and specialized departments / units within the Sars shows its dedication to addressing the growing gap within the country’s tax network.
A number of recent legislative changes indicate that the focus is primarily on expats:
- Section 10 (1) (o) (ii) (the foreign employment exemption) was capped at R1.25 million as of March 1, 2020.
- In dealing with non-compliance, the word ‘intentionally’ was removed from the Tax Administration Act, which offers Sars more leverage to prosecute taxpayers who allege negligence for failing to meet their tax responsibilities.
- Phasing out of formal emigration through the South African Reserve Bank (Sarb).
- The introduction of the three-year “ lockdown ” rule regarding the withdrawal / charging of retirement vehicles as of March 1, 2021.
- Guidelines published on the Sars website in July 2021 on the process to follow to declare a tax non-resident.
- The proposed ‘exit tax’ on retirement funds / vehicles as of March 1, 2022.
The changes in the expatriate laws clearly indicate Sars’s intention to reap his share of the foreign income.
The impracticality of these changes
From a practical standpoint, the action of Sars’ newly acquired firepower has not only left the overall taxpayer in a confused state, it has caused much frustration. By phasing out the Sarb process of formal emigration, expats are now subject to audits by Sars to establish their non-resident status and further justify their intentions.
Also, the proposed exit fee for retirement funds presents a bit of a conundrum.
It contradicts the three-year lockdown rule, which legally restricts non-residents from collecting or withdrawing their retirement funds until they can prove their non-residency for three consecutive years. A Tax Compliance Status (TCS) pin is required as part of the new financial migration process to cease tax residency with Sars and successfully collect retirement funds. However, the three-year lockout rule makes the TCS pin redundant, as it expires after 12 months with no procedure currently in place to reactivate or regenerate it.
Submissions to oppose this proposed law have been met with silence.
With the implementation deadline looming, taxpayers are wondering what Sars is doing.
How will Sars find me?
Sars has previously gone into hibernation, only to rebound with renewed vigor in his pursuit of taxes on foreign earned income. During these uncertain times, a common question posed by expats is “How will Sars find me?”
This shameless and misinformed perspective on tax compliance is quickly dissipated by the time Sars provides his now infamous ‘Offshore Assets and Foreign Income Streams’ audit. We are clearly not dealing with the Sars of yesteryear. This is also attributed to the restructuring of its divisions, as well as the automatic exchange of information between jurisdictions.
Sars recently formed a Overseas Employment Unit and introduced a High Wealth Individuals (HWI) segment, a specialized research unit with a budget of R3 billion. High net worth audits have become commonplace for the new unit.
These include lifestyle audits or even social media post polls. Any discrepancies found during the audits may result in criminal prosecution under Section 234 of the Tax Administration Act of 2011, as amended by section 35 of the Tax Administration Acts Amendment Act of 2020.
While the parameters of tax noncompliance have become a point of contention, expatriates must be aware of the realities of tax administration and not forget that the onus is on them to continue to comply with taxes. Rather than potentially or unintentionally submit to criminal prosecution, they should take deliberate and careful steps to address their tax matters and seek to conduct a tax diagnosis under the guidance of a provider with a strong legal and tax component.
The authors are from Tax Consulting SA – Victoria Lancefield is GM for Financial Emigration and Sthembile Mkhize and Deshika Padayachy are expat tax specialists.