An analysis of ceasing to be tax resident in South Africa

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An analysis of ceasing to be tax

resident in South Africa

SK Mac Hutchon

orcid.org/0000-0002-3168-7904

Mini-dissertation accepted in partial fulfilment of the

requirements for the degree

Master of Commerce

in

Taxation

at the North-West University

Supervisor: Prof K Coetzee

Graduation: May 2020

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i To those people in my life who knew I could do this:

Thanks to my family who kept me sane and gave me the encouragement to finish; To my friends who accepted my absences and stood by me through this process; To God and the prayers from my small group that kept be going;

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ABSTRACT

Since the announcement of the change in the foreign employment exemption in the National Budget in 2017, and the increase in the global networking, as well as political uncertainty in South Africa, many South Africans have left the country, either on a temporary or permanent basis, to start a new life somewhere else.

The implications of leaving South Africa permanently, is a decision that will affect a person, both practically, and from a tax and exchange control perspective. The facts and circumstances for each person exiting South Africa need to be addressed on a case by case basis to determine how he will be affected from a tax and exchange control point of view.

SARS has a comprehensive set of residency rules that need to be applied from a tax perspective and there is international case law and double tax agreements that need to be examined in order to determine a person’s tax position. From an exchange control perspective further rules and regulations exist where a person wish to exit from South Africa permanently and extract their remaining assets from South Africa in the most productive way possible. Emigrating from an exchange control perspective will also affect any future transactions taking place when that person wishes to transact with South Africa in the case of investment and receiving an inheritance. In comparing the tax legislation and exchange control restrictions in South Africa to that of India and Russia sought to determine the similarities the three countries may exhibit. All three countries being regarding as developing nations with large numbers of persons exiting their country of origin to relocate to other parts of the world.

In making the comparison between South Africa, Russia and India it can be seen that South Africa has a more advanced set of rules surrounding the breaking of tax residency that can be used as a guide by Russia and India in protecting the extent of their tax revenue leaving their shores on emigration. From a domestic perspective, it could be recommended that SARS implement a practical system in order to monitor the change of taxpayer’s residency to help align the legislation with the practical implementation and the interaction between SARS and the SARB. South Africa has a firm set of legal guidelines and interpretation surrounding the ceasing to be resident. The practical application of the law, however, does not always align with the legislation.

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KEYWORDS USED

Ceasing to be resident Double taxation agreement Exchange control residency Natural person

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ACKNOWLEDGEMENT... I

ABSTRACT ... II

KEYWORDS USED ... III

TABLE OF CONTENTS ... IV

LIST OF ABBREVIATIONS ... VIII

LIST OF FIGURES ... IX

CHAPTER 1: INTRODUCTION ... 1

1.1 Introduction ... 1

1.2 Background to study ... 2

1.3 Motivation of the study ... 4

1.4 Reference to previous studies ... 6

1.4.1 Study one ... 6 1.4.2 Study two ... 6 1.5 Problem statement ... 7 1.6 Research objectives ... 7 1.6.1 Primary objective ... 7 1.6.2 Secondary objectives ... 7 1.7 Research methodology ... 8

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1.8 Chapter overview ... 10

1.8.1 Chapter 1: Introduction ... 10

1.8.2 Chapter 2: The definition of tax residency ... 10

1.8.3 Chapter 3: A comparison ... 10

1.8.4 Chapter 4: Summary and conclusions ... 11

CHAPTER 2: THE DEFINITION OF TAX RESIDENCY ... 12

2.2 Domestic tax legislation ... 12

2.2.1 The first residency test – being ordinarily resident ... 15

2.2.2 The second residency test – the physical presence resident ... 19

2.3 The application of a double taxation agreement... 20

2.3.1 Article 4 of the OECD Model Tax Convention ... 22

2.3.2 Tax resident in two countries ... 23

2.3.3 The application of a DTA in a South African context ... 24

2.4 Exchange control ... 24

2.4.1 Exchange control restrictions applicable to natural persons ... 25

2.4.2 Exchange control residency ... 27

2.5 Permanent residency ... 28

2.6 Ceasing to be tax resident for income tax purposes ... 29

2.6.1 Domestic legislation ... 29

2.6.1.1 Practical implications of ceasing to be a tax resident ... 33

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2.6.1.1.2 Two years of assessment in a 12-month period ... 34

2.6.1.1.3 Income earned from a South African source ... 37

2.6.1.1.4 Taxes due to SARS in respect of the exit charge ... 38

2.6.2 Ceasing to be tax resident in terms of the ordinarily residence test ... 39

2.6.3 Ceasing to be tax resident in terms of the physical presence test ... 41

2.6.4 Ceasing to be a tax resident in terms of a DTA ... 42

2.7 Ceasing to be a resident for exchange control ... 43

2.7.1 Tax clearance application ... 44

2.8 Ceasing to be a permanent resident ... 45

2.9 Conclusion ... 45

2.9.1 Income Tax ... 46

2.9.2 Permanent residency and citizenship ... 47

2.9.3 Exchange control ... 47

2.9.4 Summary table ... 48

CHAPTER 3 – A COMPARISON ... 49

3.2 Tax residency in India ... 50

3.2.1 Domestic tax legislation ... 50

3.2.2 Ceasing to be tax resident ... 51

3.2.3 Double Taxation Agreements ... 53

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3.2.6 The emigration of Indian nationals for purposes of employment ... 55

3.3 Tax residency in Russia ... 58

3.3.1 Domestic tax legislation ... 58

3.3.2 Ceasing to be a tax resident ... 59

3.3.3 Double Taxation Agreements ... 59

3.4 A comparison... 62

3.4.1 Income tax ... 62

3.5.1 Summary table ... 66

4.2 Research objectives ... 68

4.2.1 First secondary objective ... 68

4.2.2 Second secondary objective ... 70

4.3 Overall conclusions and recommendations ... 71

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LIST OF ABBREVIATIONS

For the purposes of this document, the following acronyms apply:

Acronym Description

AEOI Automatic Exchange of Information

BRICS Brazil, Russia India, China and South Africa CBR Central Bank of Russian Federation

CBDT Central Board of Direct Taxes CGT Capital Gains Tax

CMA Common Monetary Area CRS Common Reporting Standard DTA Double Taxation Agreement FATF Federal Tax Services

FTS Federal Tax Service of Russia HUF Hindu Undivided Family MTC Model Tax Convention OCI Overseas Citizen of India

OECD Organisation for Economic Co-operation and Development OEEC Organisation for European Economic Co-operation

PIO Persons of Indian Origin RBI Reserve Bank of India SARB South African Reserve Bank SARS South African Revenue Service

UK United Kingdom

UN United Nations

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LIST OF FIGURES

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LIST OF TABLES

Table 2-1: Illustration of becoming resident in South African in terms of the physical

presence test after ceasing to be ordinarily tax resident ... 41

Table 2-2: Summary of residency ... 48

Table 3-1: Income tax comparative summary ... 66

Table 3-2: Exchange control comparative summary ... 67

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1

1.1 Introduction

Before 1 January 2001, South Africa’s income tax system was source-based, taking into account a few concessions, where residency was not the primary measure used to determine a person’s taxable income in South Africa. South Africa adopted a residence-based system of taxation on 1 March 2001, resulting in a South African natural person being subject to tax on their worldwide income (South African Revenue Service (SARS), 2000:1-4).

In South Africa, there are three distinct definitions of residency –

 Being a resident of South Africa for immigration purposes, governed by the South African Department of Home Affairs, in terms of section 25, 26 and 27 of the Immigration Act (13 of 2002) (South Africa, 2002);

 Being a resident of South Africa for exchange control purposes, governed by the definition set out by the South African Reserve Bank (SARB) currency and exchange manual for authorised dealers (hereafter referred to as the Exchange Control Manual) (South African Reserve Bank (SARB), 2019:18); and

 Being a resident of South Africa for tax purposes, as set out in section 1 of the Income Tax Act (58 of 1962) (South Africa, 1962) (hereafter called the Income Tax Act), which relies on South African domestic legislation as set out in section 1 of the Income Tax Act, international case law, and the interaction with a Double Taxation Agreement (DTA). In the tax year ending 29 February 2000, before the change in the tax regime, for a South African tax resident working abroad the only exemption from income tax available to them in South Africa was section 10(1)(o) of the Income Tax Act. The section only extended to South African taxpayers working as officers or crew members of a ship engaged in the international transportation of passengers or goods or prospecting or mining for minerals (SARS, 2000b). In light of the change in the tax system – to one of residence based, this section was amended to now also include South Africans earning income from foreign employment as per the Revenue Laws Amendment Act (59 of 2000) (South Africa, 2000a).

One of the reasons for the change in the South African tax system mentioned by National Treasury in a media briefing dated 15 September 2000 was ‘to bring the South African tax system more in line with international tax principles’. Another was ‘to place the income tax system on a sounder footing, thereby protecting the South African tax base from exploitation’ (SARS, 2000:1).

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On 22 February 2017, the Minister of Finance, Pravin Gordhan, declared his intention to remove the foreign employment exemption from the South African tax legislation currently found in section 10(1)(o)(ii) of the Income Tax Act. This change was applied because the exemption was found to be ‘excessively generous’ (National Treasury, 2017a:138).

1.2 Background to study

As set out in the full budget review published by the National Treasury of the Republic of South Africa on 20 February 2019, the National Treasury estimated a revenue shortfall of R42.8 billion in 2018/19 (National Treasury, 2019:35). The Treasury is, therefore, trying to collect additional revenue from as many sources as possible to make up the shortfall.

Following the announcement in the National Budget in February 2017, there was much discussion in the expatriate community leading to some misunderstanding and confusion. As per a radio interview on 702 Talk Radio in August 2018, Jonty Leon, a manager at Financial Emigration stated after the announcement in the budget to repeal the foreign employment exemption in its entirety; he had seen an increased surge of South Africans choosing to leave South Africa. Those that have already left without previously formalising their exit are choosing to return to South Africa to complete the process in order for them to no longer be South African residents (Leon, 2018). The definition of a resident in section 1 of the Income Tax Act is a natural person who is ‘ordinarily resident in the Republic’ or, if not ‘ordinarily resident’, someone who meets the requirements of the ‘physical presence test’ (South Africa, 1962). The Income Tax Act does not, however, define the term ‘ordinarily resident’, so one would need to turn to case law in order to establish the international principles to support the determination as per SARS interpretation note 3 (SARS, 2018a:2).

The physical presence test is a time test, based on the number of days that a person is physically present in South Africa. When addressing the concept of residency from a domestic tax legislation point of view, this test will only apply should a taxpayer not be regarded as ordinarily resident in South Africa during any year of assessment (SARS, 2018b:2). This test becomes important should a taxpayer break residency in terms of the ordinarily residence test and continue to visit South Africa after this date.

To align South African tax principles to those used internationally, the definition of resident in the Income Tax Act also needs to take international tax treaties into account. Double tax treaties may exclude a taxpayer from being a resident of South Africa based on their facts and circumstances (Olivier & Honiball, 2011:24).

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The purpose of a double tax treaty/agreement (DTA) is to alleviate tax paid in two countries where there is a conflict between the taxpayer being resident for tax in both countries or where a taxpayer is a resident in one, but the source of the income is in another (Olivier & Honiball, 2011:276). There is a specific Article set out in the DTA between two countries that assists with the determination of the tax residency status of a taxpayer in each country. To try and maintain a consistent standard between the various treaties entered into, the Organisation for Economic Co-operation and Development (OECD) has published their Model Tax Convention (MTC) including explanatory commentary to assist as a guide (Olivier & Honiball, 2011:268). As per the OECD MTC and most DTA agreements, the concept of residency is discussed in ‘Article 4’ (OECD, 2017:32). Where a DTA is agreed between two countries, it is vital to study this Article as should the residency definition be different to that used in domestic legislation, the DTA definition will apply.

The definition of a resident for exchange control purposes, set out in the Exchange Control Manual, is a separate definition to that set out in the Income Tax Act (SARB, 2019b:18). In terms of section B.2 J(i)(b) of the Exchange Control Manual, formalising an emigration via the SARB requires the applicant to obtain a tax clearance certificate from SARS to confirm their tax compliance status (SARB, 2019b:73-80). In terms of section 9H of the Income Tax Act, ceasing to be regarded as a resident of South Africa for tax purposes does not refer to an exchange control application being a requirement for SARS (South Africa, 1962).

Based on the report-back hearing to the Standing Committee on Finance and Select Committee on Finance in Parliament, a concession was made to change the existing foreign employment exemption as an alternative to the complete repeal of this section as initially proposed (National Treasury, 2017b:6-9). Up until the change in legislation the exemption in section 10(1)(o)(ii) of the Income Tax Act (58 of 1962) (South Africa, 1962) stated that all remuneration earned by an individual working outside of South Africa during the period in question would be exempt from tax in South Africa should all of the following criteria be met:

 A taxpayer has to be a South African tax resident;

 Receive remuneration for services rendered outside South Africa; and

 That taxpayer needs to be outside South Africa for a period exceeding 183 full days in aggregate during any period of 12-months as well as for a continuous period of more than 60 full days during those 12-months.

The change to section 10(1)(o)(ii) of the Income Tax Act has been promulgated into law as per sub-paragraph (ii) to be amended for the words preceding items (aa) by section 16(1)(g) of the Taxation Laws Amendment Act of 2017 (South Africa, 2017). This law will come into operation

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with effect from 1 March 2020, being applicable in respect of years of assessment commencing on or after that date.

As a result of the change, the same criteria as before need to be met. However, only the first R 1 million of the remuneration earned during the qualifying 12-month period is exempt from income tax (South Africa, 1962). The remuneration over R 1 million is subject to South African income tax as per the tax tables legislated by Treasury, that is as per the progressive tables as published in Schedule 1 of the Rates and Monetary Amounts and Amendments of Revenue Act each year (South Africa).

The complication arises when it first needs to be determined whether the taxpayer will remain a tax resident of South Africa, while the services are being rendered abroad for the exemption to still apply. This process uses domestic legislation and examination of the DTA where applicable. The practical implications of verifying the foreign tax credit to be deducted against this income subsequently need to be investigated. In some cases, the taxpayer will be paying tax in both countries, and only able to claim relief at a later date (SARS, 2009:1-4).

Since the budget announcement in February 2017 to completely repeal the foreign employment exemption, it has become abundantly clear that many expatriates who left South African many years ago are now enquiring about their tax residency status in South Africa. Even though this foreign employment exemption has been a part of South African tax legislation for many years, South Africans are only now questioning its application and whether the exemption applies to them. Some taxpayers, having broken tax residency in South Africa many years ago in terms of a DTA, are only now wanting to formalise their emigration. As many taxpayers were not aware of the exit charge due to SARS in terms of section 9H of the Income Tax Act, it may result in additional tax paid to the SARS (Researcher’s observations based on media coverage and interaction with public).

1.3 Motivation of the study

One of the main incentives encouraging expatriates to locate to the Arabian Gulf for employment purposes is the remuneration earned in the Gulf (Baruch & Forstenlechner, 2017). Currently, the personal income tax rate in the Gulf countries – including Kuwait, Qatar, Saudi Arabia and the United Arab Emirates is zero per cent (Trade Economics, 2019). This results in the remuneration earned being tax-free at the source. Although the cost of living in these countries is quite high, the incentive to work there remains favourable due to the nil tax rate for personal income tax. As per the International Migration Report 2017 Highlights document published by the United Nations (UN), international migration numbers have increased faster than the world’s population.

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As per the report, ‘the share of migrants in the total population increased from 2.8 per cent in 2000 to 3.4 per cent in 2017’ (UN, 2017:5).

According to Gerald Seegers, Director of Human Resources at PwC Southern Africa, ‘many companies are facing the reality that they do not have the right talent in the right places to fulfil their global growth ambitions’. Some of the reasons include a skills gap in foreign market places with an ever-changing corporate environment. The younger generation also has a greater propensity to travel, highlighting the need for more international work opportunities. PwC has noted that the number of workers who travel to other countries for work opportunities and spend more than one or two weeks at a time in a foreign country increased to approximately 8% of the workforce, with the average length of assignment being around 18 months (PwC, 2013).

In some cases, the exodus of skilled professional(s) has become a significant concern, particularly in the health profession, where the emigration potential increases due to the degradation of the working and living conditions in South Africa for these professionals (Crush & Pendleton, 2010). Many South African residents seek employment opportunities outside South Africa, either out of necessity, to expand their expertise or for the tax benefit of not paying tax in South Africa having the benefit of the foreign employment exemption. In many cases, they pay little or no tax in the foreign jurisdiction, and as a result, live a more lavish lifestyle in South Africa while still enjoying the benefits of the country without paying tax. In some cases, however, the decision to work abroad is not always to minimize the tax that is paid to SARS, as many expatriates have permanently relocated to countries outside of South Africa (Researcher’s observations based on media coverage and interaction with public).

As per an article in the City Press on 17 January 2019, ‘Although neither the Department of Home Affairs nor the International Relations Department keeps figures on how many people are leaving the country for good, anecdotal evidence suggests a sharp rise in emigration among South Africans seeking new lives abroad’ (Zanayriha, 2019). According to this same article, experts predicted that last year had one of the highest number of emigrations placed on record after a sudden increase in 2015 when records reflect that more than 25,000 South Africans relocated to other countries.

As per government notice no 192 published in government gazette 40660 dated 3 March 2017, SARS has also now agreed to be part of the Automatic Exchange of Financial Information (AEOI), better known as the Common Reporting Standard (CRS). As per this gazette, financial information, including income earned in foreign jurisdictions for the period 1 March 2016 to

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28 February 2017, must be reported to SARS by that foreign jurisdiction’s revenue authority by 31 May 2017 (SARS, 2017).

As of 24 April 2019, 105 countries have signed the Multilateral Competent Authority Agreement on AEOI and intended first information exchange date, including South Africa (OECD, 2019). There will come a time where South African tax residents working for a foreign employer deposit income into an offshore account located in a tax jurisdiction signed up with CRS. This income will be reported to SARS, and SARS will become aware of income if not disclosed to them.

As a result of the above, there is often a misunderstanding about the concept of tax residency and the breaking of tax residency where taxpayers have permanently left South Africa to take up employment in other countries. It could even be argued that there is a weakness in the South African personal income tax system, in the monitoring of a person’s tax residency status in light of taxpayers relocating to other countries for purposes of employment. The current change in legislation affecting the foreign employment exemption resulted in more South Africans investigating their residency status and discovering that they have unknowingly already broken tax residency in terms of a DTA.

1.4 Reference to previous studies

In preparation for this study, two previous studies were reviewed.

1.4.1 Study one

The mini-dissertation of Anne du Plessis was reviewed. Her mini -dissertation was examined in October 2018 by North-West University (Du Plessis, 2018).

The title of her study was ‘a review of the residency definition for natural persons in the South African income tax regime’.

Although her study also addresses the issue of residency in South Africa questioned as a result of the change in the foreign employment exemption legislation, it focuses on the concept of residency. This study concentrates more on the legislation governing the breaking of tax residency and the practical issues encountered as a result of no longer being a tax resident in South Africa and the practical implications thereof.

1.4.2 Study two

The masters thesis of Richard Loyson was reviewed. His dissertation was examined in 2010 by Nelson Mandela Metropolitan University (Loyson, 2010).

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The title of his study was ‘a critical analysis of the income tax implications of persons ceasing to be resident of South Africa’.

Although his study also addresses the issue of residency in South Africa, his study addressed the implications for all taxpayers including persons other than a natural person. His study was also completed in 2010. The laws surrounding tax residency have been amended since this time and new legislation has been implemented following this study in relation to ceasing to be a tax resident. This study concentrates more on the legislation governing the breaking of tax residency, particularly with reference to the taxpayer who is a natural person which is a different focus to his study.

1.5 Problem statement

The changes in the foreign employment exemption could result in an increased number of taxpayers approaching SARS in order to break tax residency in South Africa. From the above the following problem statement can be formulated: The implications of a natural person breaking tax residency and the process thereof are complex and must be analysed. The question arises as to how to interpret the rules surrounding the breaking of tax residency and whether other countries could provide a better solution.

1.6 Research objectives

1.6.1 Primary objective

This study considers the current meaning of the definition of residency for a natural person according to the Income Tax Act, and the interaction with the definition of residency for exchange control purposes and country residency rules. This study will specifically focus on the steps to be taken where a taxpayer ceases to be tax resident as a result of their relocation to other countries on a permanent or semi-permanent basis.

1.6.2 Secondary objectives

 To critically analyse who is a resident for tax purposes in South Africa, considering South African income tax legislation, foreign case law interpretation and the application of double tax agreements (Chapter 2);

 To review the impact of breaking tax residency in South Africa and the notion of financial emigration via a comparison (Chapter 3); and

 To conclude and make possible recommendations as to what can be learnt from the discussion details in Chapter 3 (Chapter 4).

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1.7 Research methodology

As part of this study, the research methodology is determined by the ontology and epistemology of the researcher, which develops the thought process leading to a conclusion.

Ontology comes from two Greek words: on, which means ‘being’, and logia, which means ‘study’. So ontology is the study of being alive and existing… something we all ponder at one point or another. When you see the word ontology, think of Hamlet agonizing over ‘To be, or not to be’ or Descartes stating ‘I think, therefore I am’ (Vocabulary.com, 2019).

Epistemology deals with the starting place of understanding in assessing the opportunities and limitations of thoughts and ideas (Dudovskiy, 2019a). Before starting to analyse a problem, a comprehensive understanding of the subject matter as a whole is essential increasing knowledge of the problem at hand.

Realism research is dependent on the concept of reality from the human psyche. This viewpoint is grounded on the supposition of an analytical and controlled style in developing awareness and ideas (Dudovskiy, 2019c).

On the other hand, in terms of the New World Encyclopaedia (2015), relativism is the view where there is no outright belief in human behaviour. Samples of various behaviours need to be gathered and observed to determine a true understanding of a collective view or belief.

In studying the area of tax legislation, certain tax concepts are defined in legislation, depending on the individual inspection of the facts. The interpretation of this legislation can, however, change the outcome of the final answer as more than one source needs investigation and opinion to reach a conclusion and avoid a narrow focus. Case law and real-life events may also impact the result. In particular, when dealing with taxpayers who are natural persons, no two person’s facts and circumstances may be the same.

Positivism and Interpretivism can be identified as two key aspects of ontology (Dudovskiy, 2019b) as can be detailed below:

 Positivism is grounded on the understanding that whatever happens can be verified through research, observation, and plausible evidence. Positivists are predominantly realists, usually considering that scientific development eliminates or dramatically reduce the difficulties facing mankind (Philosophy Terms, 2018). Positivists conventionally emphasise quantitative

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research, such as surveys in order to determine the social trend and view of society (Thompson, 2015).

 Interpretivists, on the other hand, take the general approach that their research is more qualitative, using unstructured dialogue or participant observation. Interpretivists believe that individuals are not mere pawns that respond on command to social influences but are more accepting and aware of why their behaviour is as it is (Thompson, 2015). Interpretivism is likely to result in the subjective interpretation of the researcher based on the facts identified as part of the study, where the hypothesis of the research could still be subject to change (McKerchar, 2008). ‘Interpretive research does not predefine dependent and independent variables, but focuses on the complexity of human sense making as the situation emerges’ (Heinz et al., 1999).

The positivist approach is not well suited to this study as this approach takes a narrow line based on the outcome of plausible quantifiable evidence. It is more suitable for a more interpretive approach whereby historically promulgated legislation addressing tax residency in South Africa is questioned to gain a wider perspective of the intention of the legislation.

A taxpayer’s residency status will vary from person to person, depending on their circumstances. Approaching South African income tax legislation relating to residency from a different perspective may assist in determining whether the current legislation addressing residency could improve or whether there are any weaknesses in the current legislation.

This study will analyse the legislation and the changes relating to the definition of residency and the breaking of tax residency, taking the foreign employment exemption into account. International clarification will be sought concerning the definition of tax residency, as although this concept is legislated, it relies heavily on case law and international guidance to support any conclusions. In order to determine why specific legislation exists and its interpretation, various views need to be examined to evaluate the consensus and understanding of the idea behind the implementation.

This study used a doctrinal research methodology. As set out by Terry Hutchinson (2015) in an article relating to the doctrinal method: ‘legal academic success has been measured within a doctrinal methodology framework, which includes the tracing of legal precedent and legislative interpretation. The essential features of doctrinal scholarship involve ‘a critical conceptual analysis of all relevant legislation and case law to reveal a statement of law relevant to the matter under investigation.’

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This study follows an inductive process of examining existing legislation and its interpretation and drawing conclusions based on common observations. A comparison assists in determining whether there are any shortfalls in the law taking into account and reviewing the relevant DTAs between South Africa and other countries in the study, as the terms of these agreements vary. This study seeks to identify similarities between countries with high numbers of taxpayers leaving their tax system, due to the breaking of tax residency and exiting their domestic tax systems and the tax treatment thereof. Examining the criteria of breaking tax residency in three countries with a large number of taxpayers leaving their tax system, could reveal any similarities and ways that the South African requirements for breaking residency can be improved on from both a tax and exchange control perspective.

1.8 Chapter overview

1.8.1 Chapter 1: Introduction

Chapter 1 sets out the background to the study, which includes the motivation for the research on this topic, problem statement, research objectives and methodology.

1.8.2 Chapter 2: The definition of tax residency

Chapter 2 sets out the meaning of tax residency in South Africa with the focus on when a taxpayer ceases to be tax resident in South Africa and when this is applicable. Chapter 2 will also examine the international commentary concerning tax residency and the interaction with OECD MTC and the UN tax treaties.

Chapter 2 will also include a discussion of financial emigration and the distinction between tax and exchange control residency.

1.8.3 Chapter 3: A comparison

Chapter 3 compares the tax laws in South Africa, India and Russia in relation to their residency rules, and the treatment when breaking tax residency. Both India and Russia, as well as being part of the Brazil, Russia, India, China and South Africa (BRICS) countries, have a high level of migrants leaving the country to seek work elsewhere (UN, 2017). All three countries have exchange control restrictions concerning cross-border transfers. A brief comparison of the regulations set out by the respective Reserve Banks will also be looked at as part of this comparison.

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1.8.4 Chapter 4: Summary and conclusions

Chapter 4 will provide any concluding comments concerning this study as well as possible recommendations for improvements of the system.

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CHAPTER 2: THE DEFINITION OF TAX RESIDENCY

2.1 Introduction

This chapter examines the definition of tax residency in more detail, taking into account the nuances between income tax and exchange control definitions of residency. It refers to international commentary and case law dealing with the international interpretation of tax residency.

With reference to the secondary objectives set out in paragraph 1.6.2 due to a possibility of a natural person being subject to tax in more than one country, it is also essential to address the interaction with the DTAs that South Africa has entered into with other countries. The OECD MTC commentary will play a role when the interpretation of treaties is required, assisting in the specific meaning of various phrases and words.

2.2 Domestic tax legislation

Before addressing the implications and requirements of ceasing to be a resident of South Africa for tax purposes, it is essential to explore the definition of tax residency as set out below:

South Africa adopted the ‘residence minus’ system of tax on 1 January 2001 with the result that residents of South Africa pay tax on their worldwide income (SARS, 2000a:1). The following definition of a resident was inserted into the South African Income Tax Act with effect from 1 January 2001 by section 2(h) of the Revenue Laws Amendment Act (South Africa, 2000a):

’Resident’ means any –

(a) natural person who is—

(i) ordinarily resident in the Republic; or

(ii) not at any time during the year of assessment ordinarily resident in the Republic, if such person was physically present in the Republic— (aa) for a period or periods exceeding 91 days in aggregate during

the relevant year of assessment, as well as for a period or periods exceeding 91 days in aggregate during each of the three years of assessment preceding such year of assessment; and

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(bb) for a period or periods exceeding 549 days in aggregate during such three preceding years of assessment:

Provided that—

(A) for the purposes of items (aa) and (bb) a day shall include a part of a day; and

(B) where a person who is a resident in terms of this subparagraph is physically outside the Republic for a continuous period of at least 330 full days immediately after the day on which such person ceases to be physically present in the Republic, such person shall be deemed not to have been a resident from the day on which such person so ceased to be physically present in the Republic.

This early definition did not, however, cater for circumstances where a taxpayer was resident in South Africa and another country as a result of their residency. A further amendment was added to the definition of residency with effect from 26 February 2003 by the following insertion to the definition (South Africa 2003) ‘but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the Republic and that other country for the avoidance of double taxation’.

It was, however, recognised by the Treasury in the 2005 National Budget that South Africa had a scarcity of skills and to encourage the influx of expatriates into South Africa the window of time used to determine whether a natural person would become resident was extended (National Treasury, 2005:82). In 2005, section 3(i), the Revenue Laws Second Amendment Act (South Africa, 2005) then amended the 91 days test explained in (aa) of the definition of a resident to be applied over five years and not three years. Furthermore, in relation to (bb) of the definition, the aggregated period over the now five-years changed to 915 days, effectively more than half a year in each of the five years.

The current definition of resident set out in section 1 of the Income Tax Act about natural persons reads as follows:

(i) ordinarily resident in the Republic; or

(ii) not at any time during the relevant year of assessment ordinarily resident in the Republic, if that person was physically present in the Republic—

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(aa) for a period or periods exceeding 91 days in aggregate during the relevant year of assessment, as well as for a period or periods exceeding 91 days in aggregate during each of the five years of assessment preceding such year of assessment; and

(bb) for a period or periods exceeding 915 days in aggregate during those five preceding years of assessment, in which case that person will be a resident with effect from the first day of that relevant year of assessment: Provided that—

(A) a day shall include a part of a day, but shall not include any day that a person is in transit through the Republic between two places outside the Republic and that person does not formally enter the Republic through a ‘port of entry’ as contemplated in section 9 (1) of the Immigration Act, 2002 (Act No. 13 of 2002), or at any other place as may be permitted by the Director-General of the Department of Home Affairs or the Minister of Home Affairs in terms of that Act; and

(B) where a person who is a resident in terms of this subparagraph is physically outside the Republic for a continuous period of at least 330 full days immediately after the day on which such person ceases to be physically present in the Republic, such person shall be deemed not to have been a resident from the day on which such person so ceased to be physically present in the Republic…

but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the Republic and that other country for the avoidance of double taxation: Provided that where any person that is a resident ceases to be a resident during a year of assessment, that person must be regarded as not being a resident from the day on which that person ceases to be a resident… (South Africa, 1962).

The first residency test as per subsection (i) of the definition above determines whether a person is ordinarily resident for tax in South Africa. There is no legislated definition of ordinarily resident in the Income Tax Act and SARS issued guidance by way of interpretation note 3, first published on 2 February 2001 and last updated on 20 June 2018 (SARS, 2018a).

The determination as to whether a taxpayer meets the requirements of being ordinarily resident is necessary before the application of the physical presence test set out in subsection (ii) of the

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definition of resident. The physical presence test only applies where a person does not meet the requirements of being ordinarily resident.

It is critical that the term ‘ordinarily resident’ should also not be misunderstood to be the same as the meaning of domicile or nationality. Becoming a resident for purposes of Home Affairs rules and the concept of immigration and emigration for exchange control purposes are also independent tests (Williams, 2005:11).

More discussion with regards to the above two tests follows below.

2.2.1 The first residency test – being ordinarily resident

In deciding whether a person is ordinarily resident in a particular country, the examination of the facts unique to each taxpayer having regard to the foundations established in case law is required (Williams, 2005:11). International and local case law has an important role in assisting with this determination.

In a prominent residency case heard in the Canadian courts, Thompson v Minister of National

Revenue (Canada, 1946) it was described that a person would be ordinarily resident:

where in the settled routine of his life, he regularly, normally or customarily lives’ or ‘at which he in mind and in fact settles into or maintains or centralises his ordinary mode of living with its accessories in social relations, interest and conveniences’ (Williams, 2005: 11).

In a 1983 English case Shah v Barnet, the term ‘ordinarily resident’ was described as a place where ‘a person must be habitually and normally resident... apart from temporary or occasional absences of long or short duration’ (United Kingdom, 1983).

When considering the ordinarily residence status of a married couple, in ITC 961 (1961) 24 SATC

648, a woman, formerly ordinarily resident in Zimbabwe, married a man in the United Kingdom

(UK) and set up home with him in the UK after their marriage. In this 1961 case, JCR Fieldsend, said:

I do not think that that mental attitude is sufficient to alter the prima facie position that on marriage to a man permanently resident in a country, with no intention of leaving that country, a wife who sets up home with her husband there cannot be said to be ordinarily resident elsewhere. She has an obligation to live with her husband in the place he has chosen for the matrimonial home, and it would require very cogent

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evidence to show that despite that obligation the wife in fact retained her pre-marital residence (Federation of Rhodesia and Nyasaland, 1961:650).

In the case of Cohen v Commissioner for Inland Revenue (South Africa, 1946a:373) the facts were as follows:

The taxpayer in question was domiciled in South Africa, but during the 1930s and 1940s travelled extensively on business, spending about half his time in South Africa and the other in Europe and America. The taxpayer derived his income from director’s fees and salaries from various companies within South Africa as well as passive income from investments in public companies located in South Africa.

During the 1940s, he applied for a permit to travel abroad with his family for nine months; this period extended for a further year after that. It was always the view that the taxpayer and his family would ultimately return home to South Africa as the taxpayer sub-let the furnished property that he leased in South Africa for five years.

JA Schreiner in the Cohen case stated:

If, though a man may be ‘resident’ in more than one country at a time, he can only be ‘ordinarily resident’ in one, it would be natural to interpret ‘ordinarily’ by reference to the country of his most fixed or settled residence… his ordinary residence would be the country to which he would naturally and as a matter of course return from his wanderings, as contrasted with other lands it might be called his usual or principal residence and it would be described more aptly than other countries as his real home (South Africa, 1946a:371).

RC Williams summarised the decisions of the courts and their understanding of what is ‘ordinarily resident’ in the following cases:

• As held in the Levene v Inland Revenue Commissioner case – the degree of continuity in which a taxpayer lives in one place, ignoring the times when the taxpayer may be accidentally or temporarily absent from this place (Canada, 1928);

• As held in the H v COT case – the place where the taxpayer’s permanent place address is located and where his/her possessions were kept while he/she was temporarily absent and where he/she returned to after his/her travels (Southern Rhodesia, 1960);

• As held in the Soldier v COT case - the residence must be established and not seen to be a semi-permanent or unintended dwelling place (Southern Rhodesia, 1943); and

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• The concept of ‘ordinarily resident’ is more restricted than that of a resident and is a place where a taxpayer typically resides.

In Commissioner for Inland Revenue v Kuttel JA Goldstone stated (South Africa, 1992a:306): I can find no reason for not applying their natural and ordinary meaning to the provisions now under consideration. … I would respectfully adopt the formulation of Schreiner JA and hold that a person is ‘ordinarily resident’ where he has his usual or principal residence, i.e. what may be described as his real home.

With international travel and international work opportunities being so readily available, it could be argued that in some cases, a taxpayer may have a real home available to him anywhere, or nowhere. Where multi-national corporates allow for some taxpayers to be in a perpetual state of wandering, the onus of a taxpayer to determine his residency status may not be that clear (Williams, 2005: 12).

Being physically present in South Africa at all times is not a prerequisite to be regarded as ordinarily resident. It is the intention of the taxpayer and the indicative steps that the taxpayer takes to make South Africa his real home that needs addressing (SARS: 2002).

In terms of SARS interpretation note 3, some of the factors that can assist in the determination of whether a natural person is ‘ordinarily resident’, can be listed as follows:

• Is it the intention of the taxpayer to be ordinarily resident in South Africa? • Where is the taxpayer’s most fixed and settled place of residence?

• Which place is the taxpayer’s habitual abode, where he/she reside most often – looking at the taxpayer’s lifestyle and mode of life?

• In which country does the taxpayer have the most business and personal interests and family ties?

• In which country is the taxpayer employed and where is his/her economic centre?

• What is the taxpayer’s immigration status, in which country does the taxpayer have permission to reside permanently, and if the taxpayer has a work permit, what are the conditions of his/her stay in a country?

• Where are the personal belongings of the taxpayer? • In which country does the taxpayer have nationality?

• Where is the taxpayer’s family and social relations closer – where are his/her friends, sports and recreational clubs, places of worship?

• Does the taxpayer have political, cultural and other ties?

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Where a person is ordinarily resident in South Africa, but also resident in another country because of the application of a DTA, the question as to which country that person will is exclusively resident is discussed further in 2.3 below.

The fact that a natural person has accepted employment outside of South Africa does not automatically result in him/her being regarded as a non-resident for tax purposes. In some cases, when temporarily abroad, carrying out a two-year employment assignment, the taxpayer maintains his/her property in South Africa with the majority of his economic investments and family connections still in South Africa. In terms of the ordinarily residence test, he/she is likely to remain a resident of South Africa.

In a recent Australian case, Harding v Commissioner of Taxation (Australia, 2018), a taxpayer was found to be a resident of Australia, even though mostly absent from Australia working abroad between the period of 2006 and 2018. In terms of Australian tax legislation, to be a tax resident in Australia, the ordinary concept and domicile tests must be met, similar to our ordinarily resident test.

In this case, the taxpayer was an aircraft engineer working in the Middle East. His wife and children who originally accompanied him to Saudi Arabia returned to Australia in 2004 due to the unrest of the Middle East, where they remained, and his children completed school. The taxpayer, although receiving a permanent employment post in Bahrain in 2009, moved around to various bases as part of his employment. The taxpayer returned to Australia from time to time on vacation, where it was held that he maintained a residence. The taxpayer argued that the property was merely a temporary home for his wife and children to live in until his son finished school. The courts found, however, that as a result of the permanent abode in Australia and that fact that he could move freely around the Middle East as part of his employment, Australia was his actual place of residence (Cliffe Dekker Hofmeyr 2018).

Taken on appeal to the Federal Court of Australia, the judgement dated 22 February 2019 for this case overturned the above decision and found that that the taxpayer was not a resident of Australia. It was held by the honourable Logan, Davies and Steward that the Commissioner had made his decision based on the taxpayer’s financial ties in Australia, including his property and investments. It was, however, concluded in Harding v Commissioner of Taxation (Australia, 2019), that these and other factors were not sufficient to conclude that the taxpayer was still a resident of Australia when the taxpayer intended to leave Australia indefinitely and not to return. It was held that:

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I have accepted that, at this point in his life, his decision was to leave Australia permanently come what may and regardless of whether his family followed him at a later date. In those circumstances, the financial arrangements which remained in place, or which were put in place subsequent to his departure, are more properly regarded as the remnants of his prior residency and the fact that he retained ongoing responsibilities to Mrs Tracy Harding and her children for whom Mr Harding provided. They should not be seen as indicators of a continuing intention to maintain residency in Australia.

It should be added that the factor of where a person maintains investments may, in these days, have little bearing on where a person resides. In the past quarter of a century there has been a growing internationalisation of investment markets which has increased the ability of people in one country to make investments in businesses in other countries. In this case it is, perhaps, not surprising that Mr Harding maintained significant investments in the relatively stable financial markets in Australia despite having abandoned his residency here.

Therefore from the above it can be deduced that applying the definition of residency to a married couple is not clear cut. One needs to address the facts and circumstances in relation to the actions of each individual and the facts and circumstances surrounding their individual and collective residency.

2.2.2 The second residency test – the physical presence resident

The second test to be applied in the Income Tax Act set out in paragraph (ii) of the definition of resident in the Income Tax Act, is a time test based on the number of days that a taxpayer is physically present in South Africa. The basis of this test is the number of days a taxpayer is in South Africa and must be applied on an annual basis to any non-resident spending time in South Africa. If at any stage during this test, should the taxpayer by way of his actions or intentions regard himself as ordinarily resident, then this test will not apply. That person would be regarded as a resident of South Africa in terms of test one (SARS, 2018b:2).

In terms of the definition of a resident set out in 2.2 above, the following criteria need to be necessary for the physical presence test to apply:

• The taxpayer needs to be physically present in South Africa for more than 91 days in the relevant year of assessment; and

• The taxpayer needs to be physically present in South Africa for more than 91 days in each

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• The taxpayer needs to be physically present in South African for more than 915 days in aggregate during the five preceding years of assessment.

Should all three of the above requirements be met, the taxpayer will be deemed to be a tax resident of South Africa from the first day of the relevant year of assessment. When applying this test, it should also be noted that a part of a day, even 10 minutes, will be regarded as a full day in South Africa, unless the taxpayer is in transit through South Africa between two countries outside South Africa (SARS, 1962).

The physical presence test is applied to look back in time, starting in the current year of assessment and going back over the previous five years of assessment. It can, therefore, only be applied after the taxpayer has already been travelling to South Africa for a period of five years. If a taxpayer is present in South Africa as a result of a three-year work visa, and it is unlikely that he extends his contract and will return to his country of origin after those three years are complete, it is clear that he will not meet the requirements of the physical presence test as he has not spent sufficient time in South Africa. The taxpayer safely remains a non-resident for tax purposes. Should it be that the taxpayer extends the contract in South Africa for more than five years he must be mindful of the physical presence test as he is regarded as a resident of South Africa with effect from the beginning of the year of assessment in which he met the conditions of this test. Should it be found that a person meets the requirements of the physical presence test, as well as being a resident of another country because of the application of that other country’s legislation, the DTAs need to be examined to determine in which country they are exclusively resident. The application of a DTA will be discussed below in 2.2.

Depending on the frequency of travel to South Africa, and time spent in the country during a year of assessment, it could take many years for a natural person to become a tax resident according to this test. It may also give rise to the possibility that the taxpayer may be ordinarily resident in South Africa, due to his continual return to South Africa.

2.3 The application of a double taxation agreement

There may often be a case where a natural person is subject to tax on the same income in two different countries. Double taxation treaties aim to release a person of the obligation to pay tax in two different countries at the same time. In this case a person is regarded as a tax resident in two countries or where income is subject to tax in one country as a result of being from a South African source and taxed in another as a result of the person’s residency (Olivier & Honiball, 2011:277).

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The elimination of double taxation can be achieved using two different approaches: In the first approach by way of an exemption – where the income or capital that is subject to tax in the country is exempt from tax in the country of residence. This exception occurs when the income or capital has its source only in one country that is not the country of residence. The second method would be by way of a tax credit allowed in the country of exclusive residence. This instance takes place when income or capital earned by a person is subject to tax in both the country of residence and the source country (OECD, 2017:17).

Model tax conventions published by various international organisations depend on the purpose and scope of relief required between the countries entering into the agreements. The most commonly used MTCs are published by the OECD (Olivier & Honiball, 2011:268).

The members of the OECD found it appropriate to simplify and standardise the financial position of taxpayers engaged in international commercial, industrial and other activities to best streamline a common resolve to be used to eliminate double taxation across multiple countries in similar circumstances. The OECD, therefore, published their MTC on income and capital, including detailed commentary to assist member countries with interpretation to the various provisions and Articles common to most DTAs. The first suggestions were proposed by the Organisation for European Economic Co-operation (‘OEEC’) on 25 February 1955 when 70 DTAs were signed between countries who were members of the OECD. The impact of the MTC expanded beyond the member countries and other interested parties leading to the publication of the Model Convention in 1992, which embraced the various comments and revisions made since 1977. Since the first version published in 1992, the MTC has been updated and changed ten times, taking into account changes in the international community with relevance to its content (OECD, 2017: 9-13).

The UN MTC, by comparison, has much in common with that of the OECD MTC discussed directly above as well as in 1.2. The UN convention had adopted the OECD MTC and generally indulges the country where the source of the taxing rights is stronger, looking at where the investment is made rather than who made the investment and is primarily based on double taxation conventions between Developed and Developing Countries (UN, 2017:iii).

Article 1 of the OECD MTC, addresses the persons covered by a DTA. In terms of this Article where a DTA exists between two countries, that agreement applies to persons who are resident in one or both of the countries who signed the agreement (OECD, 2017:28).

Article 1 of the UN MTC similarly applies to a natural person on a similar basis, although in terms of the UN model the scope of the conventions and to whom it applies was previously more

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restrictive, including ‘citizens’ as persons to whom the treaty will apply (UN, 2017:59). The domestic definition of residency in each country is, therefore, vitally important and needs defining before applying any DTA.

2.3.1 Article 4 of the OECD Model Tax Convention

Article 4 of the MTC addresses the definition of who is a resident. This definition differs from treaty to treaty.

The general structure of this Article defines who is considered to be a resident in paragraph 1 and then sets out the tie-breaker clause in paragraph 2. The tiebreaker will only apply where the person to whom the MTC applies, is resident in both countries and assists with the determination of where that person is exclusively resident.

Paragraph 1 of Article 4 states that –

the term ‘resident of a Contracting State’ means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence… and also includes that State and any political subdivision or local authority thereof as well as a recognised pension fund of that State. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

This definition is quite broad, and as the MTC is only a general guideline, it can change from treaty to treaty. As an example, when looking at the DTA between South Africa and the United States of America (USA) –

In terms of Article 4, a resident of the USA is defined as: ‘any person who, under the laws of the United States, is liable to tax therein by reason of his domicile, residence, citizenship….’ And a resident of South Africa is: ‘any individual who is ordinarily resident in South Africa…’. The above reveals that in order to meet the definition of resident, it could be necessary to examine a person’s domicile, residence, citizenship and the tax concept of whether they are ‘ordinarily resident’ (SARS, 2019b:5).

From a South African perspective, the term ‘domicile of choice’ is ‘acquired by a person when he is lawfully present at a particular place and intends to settle there for an indefinite period’ (South Africa, 1992b). The word ‘domicile’ is defined as ‘the country that a person treats as their permanent home, or lives in and has a substantial connection with’ (Lexico, 2019).

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As per the OECD commentary, it states that the term ‘resident’ when looking at the MTC should refer to the concept of residence concerning the domestic laws of the countries in question and primarily aims at addressing that person’s attachment to that country (OECD, 2017:106). It is advantageous to understand or seek advice on the tax laws for each country to assist with this determination.

Having citizenship in a country, as a determining factor is self-explanatory. In most cases, however, many natural persons will not have immediate citizenship when relocating to another country but instead obtain permanent residency in that country for a period before obtaining citizenship. This is a clear indicator and does not require any additional investigation or analysis to determine.

2.3.2 Tax resident in two countries

Where a taxpayer is resident in terms of the domestic legislation of two countries and a DTA is available, paragraph 2 of Article 4 sets out the tie-breaker rules to be applied to determine where a taxpayer is exclusively resident.

Using the OECD MTC as reference (OECD, 2017:30), the tie-breaker rules are as follows: Whereby reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests); b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode; c) if he has an habitual abode in both States or in neither of them, he shall be

deemed to be a resident only of the State of which he is a national;

d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

Applying the tie-breaker rules set out in paragraph 2 of the DTA can be quite a common application when relocating to another country. A person can have a home in both countries and

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have an equal amount of personal and/or economic ties in South Africa and the other country. In this instance, the decision of residency needs to be determined by ‘competent authorities’ being the revenue authorities of each country to which the DTA is being applied (OECD, 2017).

As described in the commentary to the DTA, the costs of approaching the relevant authorities can vary in relation to the arbitration process required. This takes place in terms of Article 25 of the respective DTA, or with guidance to the MTC, should the relevant DTAs relating to the countries not address a similar Article addressing the mutual agreement between tax authorities (OECD, 2017).

2.3.3 The application of a DTA in a South African context

Currently, South Africa has signed a DTA, and in some cases a protocol, with 23 other African countries and 56 countries outside of Africa. Copies of such agreements and when it was signed and ratified are available on the SARS website (SARS, 2019c).

When determining a person’s tax residence status, the first step is to apply the domestic legislation as set out above in 2.2, and by applying the domestic legislation in the other country that the taxpayer would be resident. The second step would then be to check the SARS website to determine whether a DTA has been entered into between South Africa and that other country. Where a person is resident for tax in both countries, the DTA will then be able to determine in which country they are exclusively resident as detailed in 2.3.

If there is no DTA between South Africa and the other country, that person’s residency is determined using domestic legislation only, as no alternative is available to supersede domestic legislation. Where the terminology used in a DTA requires additional clarity, the commentary given by the OECD MTC can generally be used for interpretation purposes.

2.4 Exchange control

The Republic of South Africa established the Exchange Control Regulations in South Africa in some form since 1939. The Currency and Exchanges Act no 9 was promulgated in 1933 together with the Exchange Control Regulations promulgated in terms of section 9(1) of this Act on 1 December 1961. As stated in the regulations, the South African Treasury has been granted the authority and permission to grant exemptions with regards to South African foreign currency reserves. The Minister of Finance, however, delegates all duties and powers imposed on the Treasury concerning these regulations to the Governor of the SARB (SARB, 2019b:12).

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The primary purpose of the SARB is to realise and preserve consistency in the interest of balanced and sustainable economic development in South Africa (SARB, 2019a). Since its incorporation, the SARB has been owned by private shareholders. To date, more than 750 shareholders have taken up shares. No more than 10 per cent of the total profits earned by the SARB is attributable to the shareholders, with the bank operations not having a primary motive of generating profits but rather serving the best interests of the country (SARB, 2019d).

2.4.1 Exchange control restrictions applicable to natural persons

Unless specifically exempt, resident individuals are subject to the Exchange Control Regulations promulgated in terms of section 9(1) of the Currency and Exchanges Act (9 of 1933) (Olivier & Honiball, 2011:733).

As a natural person who is resident for exchange control purposes, a resident has two allowances available in order to invest funds outside of South Africa. The first being a capital allowance of R10 million, where an individual, with the support of a tax clearance obtained from SARS, remits R10 million per calendar year offshore for investment purposes (SARB, 2019b:46). The second allowance is the single discretionary allowance of R1 million per calendar year that does not require a tax clearance certificate and can be used for any legal purpose abroad, including for travel and investment purposes (SARB, 2019b:94). Where any funds are externalised other than using these two allowances, such investments will be regarded as unauthorised and held in contravention of Exchange Control Regulations.

In terms of Regulation 6 of the Exchange Control Regulations, if a resident becomes entitled to any foreign currency, they are obligated to make a declaration of such currency to their Authorised Dealer. Furthermore, the foreign currency needs to be repatriated to South Africa and offered to an Authorised Dealer for conversion into ZAR within 30 days (South Africa, 1961:9-10). There are, however, exceptions to this regulation, such as when the services rendered for which the individual received remuneration were outside of South Africa. In this case the remuneration need not be remitted back to South Africa. (SARB, 2019b:151).

In terms of Regulation 7 of the Exchange Control Regulations, where a resident becomes entitled to foreign assets, they are required to advise their local Authorised Dealer in writing of details of the asset they acquired and how it was obtained within 30 days of receipt. The individual is not entitled to sell such an asset without first seeking permission from the SARB (South Africa, 1961:12). Foreign inheritances received from the estate of another exchange control resident fall under Regulation 7, and be retained abroad if the funding of the assets took place via the regulated channels available to the deceased. Where an inheritance is received from a

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non-resident estate after 17 March 1998, such inheritance is exempt from this regulation (SARB, 2019b:151).

Where a natural person has utilised their foreign capital allowance and invested funds in an offshore structure, they must also be mindful of Regulation 10(1)(c) of the Exchange Control Regulations. This regulation prohibits the direct or indirect export of capital from South Africa, loosely referred to as a loop structure (South Africa, 1961:14). Where there is a loop structure, this is seen as a contravention of this regulation.

A loop structure is as follows – where a person invests into an offshore structure, being a trust or a company, using his foreign capital allowance or assets/currency authorised by the SARB. The foreign structure then, in turn, reinvests into South Africa by way of purchasing shares/property investment in a South African structure. Any income and/or capital then earned in/by the South African structure is then directly and indirectly exported from South Africa (Olivier & Honiball, 2011:734-735).

Figure 2-1:

A typical loop structure

(Olivier & Honiball, 2011:735)

Up until 31 October 2019, a private individual was prohibited from entering into a loop structure as described above. The SARB have now relaxed their requirements, now allowing a private individual to invest up to 40 per cent in a foreign target entity which can in turn reinvest into South Africa, on application to the SARB. (SARB, 2019).

South African

Company

BVI Company

South African resident settles/ loans funds into offshore trust

Jersey Offshore Trust hold 100% shares in BVI Company

BVI Company holds 100 % shares in South African Company

Dividends and capital gains

Overseas South Africa