The South African Revenue Service (SARS) recently began sending out letters to taxpayers working abroad, confirming their change in status to non-residents for tax purposes.
This is a somewhat peculiar development for expatriates who have previously ceased their tax residency, as they are now requiring an additional step to objectively support their non-residency as issued directly from SARS, said Thomas Lobban, legal manager for cross-border taxation at Tax Consulting SA.
“As some taxpayers have discovered, this is not as simple as merely contacting SARS and requesting the letter. SARS is first verifying one’s status and then only issuing the letter of non-residency,” he said.
“The supporting documents and clarifications requested by SARS are onerous, at least nine points in total, and which range from a letter of motivation setting out the facts and circumstances in support of the taxpayer’s declaration of non-residency, all the way to the granular details of their social interests – for example, if you still maintain a gym contract in South Africa.”
Are we seeing an ‘expatriate trojan horse’?
A taxpayer will request the letter to confirm their status as a non-resident, not to cease their South African tax residency, which is a separate preceding declaration made to SARS, said Lobban.
“Put differently, this means that a taxpayer who has already undergone the onerous process of proving their non-residency to SARS must further undertake to satisfy the same onus of proof upon requesting the SARS letter to confirm this status.
“In effect, non-resident taxpayers are subjected to these audits even after ceasing residency,” he said.
A decision by SARS not to issue the letter upon a taxpayer’s request is indicative of the fact that the taxpayer cannot prove that they are non-tax residents in South Africa, he said.
“This puts the taxpayer in a precarious position and it begs the question if it effectively nullifies any process that was previously undertaken by the taxpayer to cease their South African tax residency – if any.
“As a further blow to these taxpayers, this decision by SARS is not one that is given effect to in an assessment, which means it cannot be challenged with the normal dispute process.”
The past comes back to haunt expats who followed questionable advice
Accordingly, non-resident taxpayers should think twice before proceeding to request this letter from SARS, said Lobban.
“The further verification request by SARS, before a non-resident letter is issued, shows that SARS is seriously considering whether a previous declaration of non-residency was properly made and accepted in each case.
“This does not bode well for those who improperly declared the cessation of tax residency or who have been assisted by careless tax advisors who incorrectly declared non-residency.”
It seems as if SARS, being aware of the concerning practices of tax advisors in matters of expatriate tax residency to date, has put these additional steps in place as a further auditing buffer, he said.
“Where the taxpayer did not actually meet the requirements for non-residency when the prior declaration was made, this will be found out after an application for a letter of non-residency is made.”
The bigger picture
One would be wise to see SARS’ non-residency letter application process in carrot-and-stick terms, said Lobban.
“While the letter – which can be relied on indefinitely – is a definite draw for non-resident taxpayers, it also brings with it the potential for any previous declaration of non-residency being undone,” he said.
“A diligent taxpayer will seek counsel from a competent advisor, preferably with a strong legal component, to determine how to apply for a letter of non-residency and guide them in the process.”