As a result of the amendment to the foreign income exemption, in the Income Tax Act, many South African seafarers and yacht crew are sailing close to the wind, often in an effort to find a means and reasons not to pay taxes in South Africa.
One of the many reasons used by South African living and working abroad is, because they have not registered for tax at the South African Revenue Services (“SARS”), it automatically means that they are not liable to pay any taxes in South Africa.
A Smooth Sea Never Made A Skilled Sailor
This line of thinking is, however, misled and misguided. As long as you are an individual who is either a South African tax resident or a non-tax resident earning South African sourced income, SARS can still find you and you will still be liable to pay taxes in South Africa.
As South Africa is a residence-based tax system, it means that tax residents are taxed on their worldwide income irrespective of where their income was earned, subject to certain exclusions and exemptions. On the other hand, non-tax residents are only taxed on income which they receive from a source within South Africa. The tax residency of an individual can be determined by using the physical presence test and/or the ordinarily resident test.
Once it has been determined that one is a tax resident of South Africa, they are required in terms of Section 22 of the Tax Administration Act no. 28 of 2011, to register for taxation purposes. Should one fail to do so, they will be guilty of an offence and could be subject to a fine and/or imprisonment.
Batten Down the Hatches
The issue is that South African tax residents working and living abroad, who have not registered for tax, think that SARS would not be able to track them down. This line of thinking is incredibly risky, as the introduction of the Common Reporting Standards (“CRS”) Foreign Account Tax Compliance Act (“FATCA”) ensures that such individuals are always within the radar of SARS.
The CRS and FATCA imposes obligations on financial institutions around the world to report on account holders who have foreign tax residencies in participating jurisdictions and their associated accounts to the local tax authority. This has resulted in financial institutions and tax authorities around the world sharing information with one another. This means that SARS will inevitably be informed of any South African tax residents working and living abroad.
Consequently, South African tax residents who have not registered for tax and who are working and living abroad cannot use the “duck and dive” approach to avoid paying taxes in South Africa. As soon as SARS becomes aware of your existence, you would not only be exposed to backdated taxes and penalties, but you could also be convicted and required to pay fines and/or face imprisonment.
Sink or Swim
It must be noted that the requirement to register for tax in South Africa is not only limited to South African tax residents. Where you are a non-tax resident, i.e. you are neither ordinarily resident nor do you meet the requirements of the physical presence test, you are still required, by law, to register for tax in the event that you own assets in South Africa and/or earn South African sourced income.
It is important to understand that, as a South African tax resident living and working abroad, the failure to register when you are required by law to do so, is a serious criminal offence. With the existence of the CRS and worldwide sharing of information, it would be dangerous to assume that SARS could never find you. If there is one thing SARS is proactive about, it is tax collection. With the information receiving avenues available, SARS will find you and once they find you, they will tax you.
Authors: Reabetswe Moloi, Admitted Attorney at Tax Consulting SA and Donne Trump, Compliance Specialist at Seafarers Global. If you have any questions for the experts, let us know at firstname.lastname@example.org.