The Tax Consulting Podcast

Residency Recommencement

• TAX CONSULTING SA

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In this episode, Richan Schwellnus, Tax Attorney, and Nikolas Skafidas, SARS Tax Compliance and Processing Supervisor, discuss the key considerations for South Africans returning home after a period abroad. 
 
As you recommence your residency in South Africa, several key factors must be addressed, including tax residency status, banking, and exchange control regulations. 
 
Failure to declare foreign-sourced income to SARS could result in significant tax liabilities, making it essential to seek expert guidance. 
 

Join us as we explore tax residency, asset structuring, and compliance with exchange control regulations to ensure a smooth transition back home. 

Speaker 1:

We're joined today with my esteemed colleague, nicholas Scafidis, who is our SARS tax compliance process supervisor in our financial immigration team. Nick, just in terms of what you are seeing these days with South Africans returning home after a period of residence abroad, what are some of the key considerations that you are seeing in terms of a banking and an exchange control perspective in particular? Thanks, Rikon.

Speaker 2:

So yeah, from clients coming back to South Africa, obviously there are major and many key considerations to take into place. But from a banking perspective, I think the major aspect is when one did financially immigrate and they became a non-resident, you had to go through the sub aspect of now noting your account as a non-resident account, okay. So the general perspective of it now coming back to South Africa, you obviously now want to ensure correct alliance or status in terms of your banks bank account. You now reflect as a resident. So in that key aspect, obviously, obviously you know you could obviously have to amend that to reflect to correct status. Otherwise it can be a conflict in terms of an exchange control perspective and again it can lead to other complications. It can lead to blocked accounts, you know, and struggling to maybe have your general debit orders go off in your account and so forth. So in terms of that aspect, those are the kind of considerations that you do see.

Speaker 1:

All right, just to take it a step back. When someone financially immigrates and they seize their tax residency, you mentioned that they then have to convert their account to a non-resident account. What does that typically entail, what are some of the restrictions that are imposed and what does it look like from a process perspective?

Speaker 2:

Yeah, so from a process perspective, now again, obviously you're going to have to be engaging with the bank directly Now when it comes to engaging with the bank directly.

Speaker 2:

There are quite a handful of documentation now to obviously substantiate that you are going to be seen as a non-resident and, again, one of the major aspects that do involve this is your notice of non-tax residency confirmation letter. That is the key aspect, obviously, seen as the golden letter, proof that you are seen as a non-resident and what other aspects are is within banks, you you know they sometimes require an approval, international transfer pin, an art, and that in itself as well is a key aspect to actually convert an account to a non-resident okay all right now in terms of you know limitations when you do have a non-resident account.

Speaker 2:

Now, generally speaking, the account itself is still seeing the same. Okay. So your day-to-day in terms of debit orders, payments, inbound, in terms of only in South Africa, that can happen as normal. It's more restrictions when it comes to an outbound payment. So if you're trying to now remit funds from within South Africa to abroad, is where the limitations now come into play.

Speaker 1:

I see.

Speaker 2:

Again, that approval international transfer plan that we did mention. That is key in terms of trying to remit funds out of South Africa. Okay, all right. So again, not major restrictions inbound South Africa, but outbound no transfer of money outside of South Africa. Again, one of the major aspects as well is that you cannot use your card outside South Africa, your normal debit card, I see. Okay, again, one of the major aspects is, which a lot of clients do not understand as well, or know, should I say, is credit cards and overdrafts have to be cancelled. It's a must.

Speaker 1:

I see now again.

Speaker 2:

That's obviously when you're going from a resident to non-resident. Obviously we were talking, you know, about non-residents coming back to South Africa. From your perspective, what are the trends of why this is occurring in terms of, as well as implications of these guys? When they do come back to South Africa, what happens to their SARS status? I don't know if you want to delve into that a bit. For sure, Thanks, nick.

Speaker 1:

So interesting question.

Speaker 1:

What we are seeing in market in recent months towards the end of the 2023 calendar year and for the duration of our current year, is we're seeing a bit of an uptick in terms of South Africans actually returning to South Africa after a period of residence abroad.

Speaker 1:

Of course, the historic trend of South Africans immigrating from the country and seeking greener pastures abroad is still the prevalent trend, so I'm by no means saying that there's a mass return of South Africans, but we are certainly seeing in our practice, a noteworthy uptick of South Africans actually returning home. The reasons that some of our clients cite for their return is often they miss home, they're homesick, they miss their traditional familial support structures. A lot of their close friends and extended family still reside in South Africa. Often they have started a young family and they would like their children to actually grow up with their grandparents and have greater exposure to that. Other reasons include certain so-called push factors, especially in your European arena. The ongoing crisis in Ukraine, the Gaza conflict, cost of living crisis in Europe is often cited, harsh weather, and all of those factors tend to push South Africans to actually return home.

Speaker 2:

So, from that perspective, obviously there's all those underlying aspects that do make South Africans come back home. But what? What happens from a SARS perspective now? Obviously, especially from a historic point of view of these guys now, when due process followed, a financial immigration process or seizing of their tax residency, what happens now when they have to return to South Africa, from a SARS point of view?

Speaker 1:

That's a good question. So it really does depend on what steps they historically took to address their tax residency status when they departed from South Africa or after they immigrated. In many instances we see South Africans that simply stopped filing a tax return. They simply neglected their affairs to some extent and they've now returned and they maybe have secured alternative employment locally in South Africa and it's now time for them to file a tax return again and they're unsure of what to do. In such cases there is an element of risk because there is this period of historic non-compliance and often we encounter that such expats do encounter some challenges with SARS and there is a bit of a clean-up exercise required in terms of historically maybe claiming a backdated cessation of tax residency under a double tax agreement, if that's available. Residency under a double tax agreement, if that's available. Yeah, so that's sort of the one class of expat that we do encounter.

Speaker 1:

In other cases an expat was compliant and they did historically financially immigrate, as an example, and they did seize their tax residency. In such cases they do need to embark on a residency recommencement process with SARS as well as with their local South African bank, and typically what that entails is they do need to inform SARS within 21 business days of their return to South Africa, or at least once they've formalized the intention to settle in South Africa again permanently, in other words to make South Africa their place of ordinary residence once more. And that is found on the actual notice of non-resident tax status confirmation letter. That letter has a built-in obligation that they must inform SARS within 21 business days upon the recommencement of their tax residency. So typically that may require a robust narrative that must be presented to SARS to explain the reasons why they have elected to return to South Africa.

Speaker 2:

And do you find that you know with clients, in terms of trying to provide proof of why they're coming back, challenging? Are there like challenges involved in that? Like you know, for instance, let's say, a particular person comes back to South Africa and a couple of months down the line they now find another opportunity to go abroad down the line, they now find another opportunity to go abroad.

Speaker 1:

Yes, that's a very good question and that does occur. What we have seen with some clients is they maybe have been retrenched abroad and by virtue of that, they've lost their work permit in their foreign host country, as an example, which is linked to their employment abroad and as they are forced to return to South Africa for a temporary period of time whilst they seek an alternative employment opportunity. In such cases there is scope depending on their factual background, of course to actually maintain their status as non-residents despite the fact that they have temporarily returned to South Africa. So a key aspect of that assessment is to evaluate their intention when they have now re-entered South Africa. Do they intend to settle here again permanently, or is it a temporary return and based on that, that will dictate the correct approach that will be adopted when engaging with SARS.

Speaker 2:

Alright perfect.

Speaker 1:

Asset planning. Alright, okay, perfect.

Speaker 2:

So then, from you know, obviously residency recommencement aspect, now assets that they hold, like from an asset planning perspective, how would you go about that, or how?

Speaker 1:

would that be done? Yes, so when an expat does return to South Africa, it is recommended that they do engage in some form of asset and estate planning. And in many cases we see that South African expats have been working and residing abroad for many years and during that time they have amassed significant assets and a noteworthy net worth. And typically, when they re-enter South Africa and they do recommence tax residency, then there will be a reintroduction of their worldwide assets into the South African fiscus. That will of course entail that if they then after that point dispose of an asset, that they will then become liable for capital gains tax, as an example. Now, before they then recommence tax residency, it is recommended, where they do have a significant asset portfolio, that they do engage in a bit of asset planning, maybe the incorporation of suitable trust structures to help them avoid estate duty in the long run, as an example, by placing those assets in a trust, whether that's a local trust or an offshore trust. That could be very beneficial for them.

Speaker 1:

In cases where they do decide to directly retain ownership of assets, there is a reset of the base cost of a certain class of qualifying assets. That will occur Simply, you know, it's best illustrated with an example. So, for example, let's say an expat has acquired shares whilst they were abroad as a non-resident and they then enter South Africa still retaining ownership of those shares. And they then enter South Africa still retaining ownership of those shares. There will then be a reset of the base cost of those shares to their corresponding market value on the date that they recommence to be a tax resident. So then in future, if they dispose of those shares, when it comes time to do a capital gains tax calculation, then it is important to record the value of those shares such that there is an accurate accounting for that, that capital gains tax perfect, just just from my perspective.

Speaker 2:

Now correct me if wrong, but if you are now obviously seizing tax residency, you have to do a deemed disposal.

Speaker 1:

Yes.

Speaker 2:

Now, like you mentioned, following through the residency recommencement process, you now started with a new base cost. Yes, all right, tax and implications from that perspective. Is there any?

Speaker 1:

Yes or no? Yeah, so when an expat recommences their tax residency, there is no tax trigger point at that time, unlike the cessation of tax residency, where there is, of course, that so-called exit tax, that deemed capital gains tax, event that does occur on the qualifying assets.

Speaker 2:

That's not the case where they re-enter. So it's a clean transition then.

Speaker 1:

It's a clean transition yes, okay, perfect.

Speaker 2:

And then another one from my side. So again, following through residency recommencement, we now obviously client has now seized tax residency. How is the past protected from the now? So I've earned income abroad. I've been working for a company for the last 20 years. I'm getting this money every single year. How is that protected from now being taxed from SARS? If we're proceeding with a commencement, I'm coming back home now forever.

Speaker 1:

That's a very good question.

Speaker 1:

So again, it will depend on how they actually seize their tax residency.

Speaker 1:

If, for example, they historically seize their tax residency on a temporary basis by means of the available and applicable double taxation agreement between South Africa and their foreign host country, then there is very, very low risk or no risk for them to actually return to South Africa, because that is by nature designed to be a temporary cessation of tax residency.

Speaker 1:

So they may simply resume or recommence their tax residency and duly notify SARS of that. However, where they have historically perhaps seized their tax residency under the financial immigration process, which is a more permanent or long-term cessation of tax residency, they historically would have made the declaration to SARS that they intended to reside abroad permanently. So in such cases it is strongly recommended that they are in possession of a robust explanation and narrative with compelling reasons that led to the change in their bona fide intention to actually reside abroad permanently. So in our earlier example, where an expat was perhaps retrenched abroad and they could no longer legally reside in their foreign host country, the preparation of a compelling narrative detailing what has occurred there, together with supporting documents such as a retrenchment notice, perhaps would be a strong explanation to sorts of what has occurred would be a strong explanation to SARS of what has occurred.

Speaker 2:

So I know one of the challenges that we do face as well with residency recommencements and the changes that have been happening in SARS over the past couple of years. Obviously, with the reset and the introduction of this notice of non-tax residency letter that we've been receiving, notice of non-tax residency letter that we've been receiving now I know this obviously will have probably fall a little bit of a part in terms of a person coming back into south africa. Yeah, now, from your experience you know, do you see this being obviously a aspect that happens a lot where these particular clients do not have, or taxpayers particularly have, this notice of non-tax residency letter, because I know this also plays into effect into the bank accounts, obviously, of reconverting them back to a resident? Yes, so from your side, is that something that is seen quite often or you know ways to work around it?

Speaker 1:

Yes, so that is something that we do encounter, especially where expats historically seize their tax residency through the old financial immigration process with South African Reserve Bank and they, you know, through ignorance or just neglect in some cases, they did not regularize that with SARS following the introduction of the RAVA1 update, the registration amendments and verification update that is required by SARS to actually confirm that non-residency.

Speaker 1:

So often expats do then return to South Africa and it is at that point that we discover that they are still regarded as being tax residents by SARS. Then, as an initial step to regularize and protect the historic financial immigration, it is then our recommendation that they first obtain that notice of non-resident tax status letter with SARS before we then embark on a formal residency recommencement process. And, as you mentioned, that does tie in closely with their bank account conversion step as well. Many authorized dealers, the local South African banks, do require that notice of non-resident tax status letter as well as confirmation you know perhaps from the e-filing records that they have now recommenced their tax residency before they will actually convert their bank accounts locally again to a normal resident account.

Speaker 2:

Okay, rinkwan, thanks very much. I think that's very insightful. I think it's not a one-two-step process that's involved here. It obviously takes a lot of thinking, a lot of planning, careful planning. But yeah, thank you for your time. Thank you for telling us more about the residency recommencement and the process involved, both from a SARS and a SABA aspect.

Speaker 1:

No, thank you, nicholas. I appreciate your time and lovely chatting with you today. Thank you, yeah.