Tax Residency and Retirement Annuity considerations for Expatriates

South African expatriates are reeling in response to the proposed changes to the foreign income tax exemption, so much so that many expatriates are investigating whether they can become non-resident for tax purposes. Similarly, expatriates who previously intended to retire in South Africa are now not so sure, and those who have a retirement annuity in South Africa are exploring the option of withdrawing the proceeds of their annuity and taking the money abroad.

With this change in attitude, expatriates should give some consideration as to whether or not they can prove their non-residency and whether they are legally permitted to cash in / withdraw their retirement annuity in a lump sum.

In terms of section 102 of the Tax Administration Act, No. 28 of 2011, the taxpayer bears the burden of proving all tax exemptions, deductions or set-offs, lower tax rates and reductions. In the same vein, it is the taxpayer and not SARS who will have to prove the taxpayer’s residency status.

In endeavouring to prove their non-residency, unfortunately it is not enough for a taxpayer to simply state an intention to be non-resident. The taxpayer will have to show something more, this by pointing to objective factors, such as their work and personal circumstances, which evidence such non-residency.

Although not in the context of residency, but still in considering the correlation between subjective belief and objective, external factors, the 2015 Supreme Court Appeal decision in Anglo Platinum Management Services (Pty) Ltd v C:SARS confirmed that “a court is not concerned with the subjective belief of the parties to the agreement – no matter how genuine that belief may be – but with whether the facts, objectively viewed, establish that this result was attained.”

A taxpayer must therefore prove with sufficient certainty, through a reliance on a significant presence of objective factors, that they are non-resident. In that regard, one factor stands out from the rest and evidences beyond any doubt that the taxpayer intends to become non-resident. This is where the taxpayer has effected a formal financial emigration through the Reserve Bank.

Interestingly, with regard to a lump sum withdrawal of a retirement annuity, the legislature seems to have taken a similar view on proving non-residency by effecting in 2016 an amendment to the Income Tax Act, No. 58 of 1962. The Act now provides that a taxpayer who intends to transfer their annuity abroad, may only do so where they are or were “a resident who emigrated from the Republic and that emigration is recognised by the South African Reserve Bank for purposes of exchange control”.

In conforming to the Anglo Platinum decision, it is therefore insufficient to rely solely on a subjective belief of non-residency for purposes of cashing in a retirement annuity. The taxpayer must objectively validate this belief, this by effecting a financial emigration. This codification of the objective test provides for absolute certainty as to the taxpayer’s residency.

Whether or not a taxpayer intends to withdraw their retirement annuity, effecting a financial emigration should still be pursued. As an attorney, it will always be easier to rebut an assessment raised by SARS where I can point to the taxpayer’s prior financial emigration and resultant non-residency.