South Africa has a residence-based tax system, which means residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African source.
Avoiding double taxation
Since tax systems differ from country to country, there is a chance that a particular amount could be taxed twice. This possibility of double taxation is, however, often alleviated by tax relief contained in various Double Taxation Agreements (DTAs)
. These DTAs are international agreements contracted between countries to deal with potential competing taxing rights against the income of the same taxpayer.
DTAs are important for encouraging investment and trade flow between nations. South Africa has DTAs with a number of other countries with a view to, amongst other things; preventing double taxation of income accruing to South African taxpayers from foreign sources, or of income accruing to foreign taxpayers from South African sources.
Do you need to apply for a directive for the relief from South African tax on pension and annuity income or want a refund of tax that was withheld, click here for more information
Why do we need to know whether an individual is a non-resident?
Although South Africa taxes residents on their worldwide income, taxpayers who are non-residents will be taxed only on their income that is sourced in South Africa (such as interest on capital invested in a local bank; or rental income generated from a fixed property situated in South Africa). A distinction therefore needs to be made between a resident and a non-resident for tax purposes
Who is regarded as a non-resident?
Let’s start by defining what we mean by resident. Understanding that, you will know whether you meet the criteria or not and thus whether you can be regarded as a resident or a non-resident.
Under South African law there are different types of residents, for example a resident defined by the Income Tax Act, 1962 in terms of the so called physical presence test and an ordinary resident
defined in terms of South African common law.
Any individual who is ordinarily resident (common law concept) in South Africa during the year of assessment or, failing which, meets all three requirements of the physical presence test, will be regarded as a resident for tax purposes.
An individual will be considered to be ordinarily resident in South Africa, if South Africa is the country to which that individual will naturally and as a matter of course return after his or her wanderings. It could be described as that individual's usual or principal residence, or his or her real home. If an individual is not ordinarily resident in South Africa, he or she may still meet the requirements of the physical presence
test and will be deemed to be a resident for tax purposes.
To meet the requirements of the physical presence test that individual must be physically present in South Africa for a period or periods exceeding –
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
An individual who fails to meet any one of these three requirements will not satisfy the physical presence test.
If the individual is neither ordinarily resident, nor meets the requirements of the physical presence test, that individual will be regarded as a non-resident for tax purposes. This means that individual will be subject to tax only on income that has its source in South Africa.
Most foreign dividends received by individuals from foreign companies (shareholding of less than 10 per cent in the foreign company) are taxable at a maximum effective rate of 15 per cent. No deductions are allowed for expenditure to produce foreign dividends.
Non-residents and Capital Gains Tax (CGT)
Non-residents are only subject to CGT on the following categories of assets:
- Immovable property or any interest or right of whatever nature of the non-resident individual to or in immovable property situated in South Africa. Examples include a flat, house, farm, or vacant land.
- Equity shares in a company when 80% or more of the market value of those equity shares, is attributable directly or indirectly to immovable property in South Africa
- A vested interest in a trust if 80% or more of the market value of that vested interest is directly or indirectly attributable to immovable property in South Africa
- The assets of any permanent establishment of a non-resident in South Africa. A permanent establishment is generally considered to be a fixed place of business through which the business of an enterprise is wholly or partly carried on.
Is a non-resident subject to CGT on the sale of shares?
- In general, this is not the case. There is, however, an exception to this rule for property-owning companies. The selling of shares in a property company owned by a non-resident will be subject to CGT if—
- that non-resident directly or indirectly owns, together with any connected individual, 20% or more of the equity shares in that company; and
- 80% or more of the market value of those equity shares at the time of disposal is attributable directly or indirectly to immovable property in South Africa.
If you need more information, then why not settle down and read one of our guides listed below.
If you are a non-resident and need advice, we have a helpline
especially set up to deal with your queries.