Authored By: Khodani Sindisiwe Simerone
University of Pretoria
In South Africa, every individual and enterprise are subject to be taxed under the South Africa Revenue Services (SARS). S3(a) of the South African Revenue Service Act No. 34 of 1997 states that SARS has the goal to accumulate revenue. (1)
In Section 102 of the Tax Administration Act No. 28 of 2011, the taxpayer is accountable or susceptible to prove that an amount is not taxable or that deductions are permitted.
From 1 March 2001, A residence-based tax system test has been implemented, known as the ordinarily resident test and the physically present test. These two tests have been implemented to asses individuals on tax accordingly and determine under which circumstances they are subject to tax (2)
This article will delve into how tax works for people who permanently or temporarily live in South Africa, how tax saving can be achieved legally and break down the complex concept of the ways SARS operates by looking at the country’s tax evolution.
History and Overview of Tax law in South Africa
The reason why tax became introduced is due to the fact that funds raised are aimed at supporting social issues and needs such as improving infrastructure, funding public goods or services and aid toward a stable and better economy. Tax is not just a method that benefits the financial system’s growth but a law that people must abide. Failure to adhere to tax guidelines and regulations may additionally result in penalties and subsequently imprisonment in extreme cases.
Tax is a complicated field that desires several tax practitioners to help individuals to have a better and straight-forward understanding of it. Fifty three percent of South Africans people had voted that it is very difficult to find out what taxes they may be supposed to pay and how the government uses the tax which they receive (69%). (3)
This is clear proof that tax is a field of importance, which additionally needs to be carefully considered and evaluated so that it can be made easier for people to understand. In this manner, SARS and its tax practitioners could have a decrease in the amount of admin work as well as back-and-forth procedures. Resources such as court and work resources will decline considerably from being wasted, only if the tax structure is designed in a way that people understand and know what they may be expected to pay and for what purpose.
The South African Tax History can help us navigate the direction of our current tax system and future tax reforms.
Before 1910, South Africa was made up of smaller areas called Republics rather than provinces. These areas were the Cape Colony, Natal, the Transvaal, and the Orange Free State. This was the period where hut taxes had been carried out as the first tax introduced. Each male adult residing in a hut had to pay once-off tax within the form of seven shillings which was collected by the local magistrates. In 1902, the Poll tax was introduced on poor residents which enforced inequality and compelled black people into the labour market.
From 1910 to 1920, World War I commenced where tax increased by 2% from 1914 to 1918. By 1920, the government received its funds specifically from tax. This is how the Excess Profit Tax came into the picture. Businesses that made more earnings than normal during war were taxed more. After World War I subsided, the Excess Profit Tax became replaced with higher everyday business taxes which increased from 5% to 7% of profit. Tax offices steadily improved in 1917 where local magistrates collected tax.
Tax was based entirely on married couples and not the man and woman individually. When the Income Tax Act was amended, women became freely dealt with as individuals. This came to the realisation from society that husbands do not need to be depended on by women for financial support.
Transfer duty on property was enforced in 1949, Estate Duty in 1955 and general sales tax in 1978 which was became finally replaced with Value Added Tax in 1991. In the end, the Capital Gains Tax was introduced in 2010.
From 1 March 2020, South African residents who are employed and receive income from a foreign country can only be taxed on that foreign employment income above R1.25 million,
despite the fact that they have been considered immigrants in another country. This is called the Expat Tax under Section 10 (1)(o)(i) of the Income Tax Act. This form of employee tax can be found in the SARS Interpretation Note 16 (Issue 4). The R1.25 million exemption is applicable only if the income is received outside the Republic, roughly at 22,2 kilometres or more beyond the baselines of the Republic.
In summary, the tax system in South Africa considerably developed from simple hut taxes to a modern complex system, taxing households to taxing individuals and the implementation from income tax to Value-Added Tax (VAT), Capital Gains Tax (CGT) and Pay-As-You Earn (PAYE). (4)
Double Taxation Agreements (DTAs) are essential in determining the taxing rights of residents and non-residents in both South Africa and another country. This is an agreement between two countries used to prevent a person from getting taxed twice on the same income they earn. They determine which country takes precedence over taxing the individual’s income, whilst encouraging international trade. The Double Tax Agreement is relevant when a person lives in one country but earns income from another one.
Income Tax Act No. 58 of 1962
Income tax is a tax levied on profit and income received by a taxpayer such as individuals, companies and trusts. (5)
The first income tax act was introduced in 1914, whereby 2% of income contributed to government revenue.
Chapter (2)(5) of the Income Tax Act 1914 highlighted the importance of income being received or accrued to an individual which in fact centralises around Section 1(1) of the Income Tax Act No 58 of 1962’s definition of gross income.
Section 1(1) of the Income Tax Act No 58 of 1962 defines Gross income for both residents and non-residents.
Gross income for residents is “the total amount, in cash or otherwise, received by or accrued to or in favour of such resident, during the year of assessment, excluding receipts or accruals that are of a capital nature”.
All amounts that a resident receives or accrues must be included as their gross income if it is from anywhere in the world.
Gross income for non-residents is “the total amount, in cash or otherwise, received by or accrued to in favour of such resident, during the year of assessment, from a source within the Republic (South Africa), excluding receipts or accruals that are capital in nature”.
WH Lategan v Commissioner for Inland Revenue (1926) established that the total “amount” in the definition of gross income also includes the value of non-cash items, in addition to that which has not yet been received.
Section 1 of the Income Tax Act defines a Resident as someone who is an ordinary resident or a company that is effectively controlled in South Africa. Residents are taxed on income they obtain from worldwide sources while non-residents are taxed on income from a South African source.
A year of assessment for an individual in South Africa to pay tax commences from 1 March to the end of February in the following year. It consists of 12 months, for example, 1 March 2025-28 February 2026.
Ordinarily residence
An ordinary resident is not defined in the Income Tax Act No. 58 of 1962. However, diverse factors can help us navigate whether or not someone can be ordinarily resident in South Africa.
A person can be considered an ordinary resident if the country is the place that they would naturally return to from their wanderings. It ought to be their principal residence or real home. This is outlined in Interpretation Note 3 (Issue 2). (6)
The SARS Interpretation Note 3 states the additional factors of being ordinarily resident include the intention (known as ipse dixit) of being in the country, degree of continuity to stay in the country, mode of life of the taxpayer, whether or not the residence is fixed or settled and physical presence in the country
The Cohen v Commissioner for Inland Revenue (1946 AD) highlights that an individual’s ordinary residence is the country which they would naturally return to from their wanderings.
In the Commissioner for Inland Revenue v Kuttel (1992) case, it was confirmed that the taxpayer’s intention is pivotal in determining residency. Having more than one residence is permitted, but only one ordinary residence.
Physical presence test
Being physically present in a country is also a determining factor of becoming a tax resident. The physical presence test is used for non-residents.
This is highlighted in the SARS Interpretation Note 4 (Issue 5). (7)
The requirements of the physical presence test that a person should be physically present in South Africa is for a period exceeding a total of 91 days all through the 12 months of assessment or year of assessment, a total of 91 days during each of the five years of assessment; and a total of 915 days throughout the five preceding years of assessment.
An individual who fails to fulfil one of these requirements will not be eligible for the physical presence test in South Africa
If the person is not an ordinary resident, or is deemed to be completely a resident of another country under the Double Tax Agreement, that person will be seen as a non-resident. When an individual ceases to be a resident during a year of assessment, they must be regarded as being non-resident from the day on which they cease to be a resident. An individual who has become a tax resident of another country through the application of a double tax agreement will also cease to be a resident for tax purposes in South Africa. (8)
A resident by virtue of the physical presence test, ceases to be a resident when they are outside the Republic for a continuous period of at least 330 days.
Tax Planning strategies for residents and non- residents
Tax Planning is a legal way of minimizing tax that is due in a tax year. There are numerous techniques utilised in tax planning. These techniques encompass reducing your usual earning and increasing your quantity of tax deductions for the duration of the year of specific worldwide tax agreements.
Though it is costly, hiring tax specialists is useful if people want to acquire a quicker and much less complicated concept of tax financial saving.
Staying up to date with regulations is advocated as tax legal guidelines and treaty provisions constantly evolve, requiring ongoing monitoring for compliance and optimization.
Individuals must ensure that they comply with the proper registration with tax authorities to avoid consequences. This is cost effective. (9)
Challenges and recommendations
Since tax has a lot of complexity, individuals are encouraged to approach tax practitioners for an accurate tax assessment. Tax regulations cannot virtually be changed in a single day, as amending law in itself is already challenging and costly.
Though there is a shortage of people within the tax field, more job opportunities ought to be endorsed and people must be willing to take tax head on and have the passion to simplify tax for the community and assist them in the satisfactory way possible.
The key to successful tax compliance is understanding residency in South Africa. Conclusion
Residents and non-residents in South Africa pay tax through being an ordinary resident or being physically present in the country. The benefits of the ordinarily resident test and physical presence test avoid individuals from getting taxed twice, allows for strategic planning to minimise tax liability and ensures that tax is clearly described.
Before paying tax, it is essential for individuals to know what it is, how it is charged, where it is paid to and for what motive.
Reference(S):
- My LexiNexis. [Online] https://sars.mylexisnexis.co.za/#/content-view;domainId=xctg.
- SARS. [Online] https://www.sars.gov.za/individuals/cease-to-be-an-sa-tax-resident-and reinstatement-of-sa-tax-resident/.
- Moosa, Asafika Mpako and Mikhali. South Africans endorse taxation, say it is fair to tax the rich at the higher rates to support the poor. Afro Barometer. [Online] 17 March 2023. https://share.google/CBGGdPKrK34GfDPq7.
- A Brief History of Tax in South Africa. Kamdar, Mahomed. 2024, Sabinet African Journals, p. 4.
- Musviba, Nyasha. South African Tax Guide. [SA Income Tax – South African Tax Guide]
- SARS. [Online] https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPD-IntR-IN-2018- 07-Arc-07-IN3-Resident-definition-natural-person-ordinarily-resident.pdf.
- SARS. [Online] https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPD-IntR-IN-2012- 04-Resident-definition-natural-person-physical-presence.pdf.
- Hlati, Thembile. Information on Residency for tax purposes. [https://www.oecd.org/content/dam/oecd/en/topics/policy-issue-focus/aeoi/south-africa-tax residency.pdf]
- Platinum Financial Services Limited. [Online] https://www.fsplatinum.com/personal/wealth planning/tax/#:~:text=The%20three%20main%20ones%20include:%20reducing%20your,our%20ag enda%20when%20considering%20your%20tax%20plan..
