South Africa: Breaking Ordinary Residence For Tax Purposes: - An Ongoing Saga...

Last Updated: 7 December 2011
Article by Hanneke Farrand and Varusha Fakir

Most Read Contributor in South Africa, September 2018

Individuals emigrating from South Africa have often been under the impression that once they have left, they are then no longer liable to pay taxes in South Africa. Repeatedly they receive informal advice from fellow emigrants stating that, provided they remain out the country for a certain number of days following their exit, that they will have terminated their South African tax residence status.

The recent UK Supreme Court judgment in the case of Robert John Davies, Michael John James and Robert Gaines-Cooper v HMRC [2011] UKSC 47, highlights that a mere absence from your home country for determined periods subsequent to exit is not sufficient for the purposes of breaking residency, but rather that an emigrant must display a distinct break from his home country.

It is inevitable that many South Africans who choose to emigrate will maintain some connections to South Africa, be it through family, friends or business. The question therefore remains, just how much must an emigrant sever ties in his home country before he will be deemed to have made a 'distinct break' and lost his tax residence status.

South African concept of residency

A resident, for South African tax purposes, is defined in section 1 of the Income Tax Act 58 of 1962 (the "Act"), in the case of individuals, as any person who is either ordinarily resident here, or qualifies as a resident in terms of the "physical presence test."

The Act provides that an individual who spends more than 91 days per tax year over a period of 6 tax years and 915 days in aggregate over the five preceding tax years in South Africa, will be deemed to be tax resident in terms of the physical presence test. Such an individual will no longer be considered to be tax resident here if he spends a continuous period of 330 full days outside of South Africa, immediately after the day on which he ceased to be physically present in South Africa.

Individuals who choose to emigrate from South Africa for exchange control purposes are regarded as non-resident for exchange control purposes with effect from the date of emigration disclosed to the South African Reserve Bank. To cease being ordinarily resident in South Africa for tax purposes is, however, not quite as simple and requires that an individual break not only his physical presence as required in the physical presence test above, but his ordinary residence too.

The Act does not define the term "ordinarily resident". The South African courts have, however, interpreted the term to mean the country to which a person would 'naturally and as a matter of course return from his wanderings'. The question of whether an individual is ordinarily resident in South Africa is therefore one of fact and degree.

The case law on the meaning of the statutory terms "resident" and "ordinarily resident", for the purposes of the Act, is not extensive. In the United Kingdom ("the UK"), where the primary nexus or connecting factor for the incidence of tax is the "residence" or "ordinary residence" and in some instances the "domicile" of an individual, some useful tests have evolved from a long line of decided cases, the most recent being the Supreme Court judgement in the Gaines-Cooper case which was dismissed on appeal from the UK Court of Appeal. Although UK cases are not binding in South Africa, they may have persuasive value and provide some guidance on the criteria which could be applied where an individual ceases to be ordinarily resident in South Africa.

Gaines-Cooper decision

Briefly, by way of background, the case concerned two sets of appellants who claimed to have left the UK permanently and to have become tax resident elsewhere. Mr. Gaines-Cooper contended that, in 1976, he left the UK permanently or for at least

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