Non-Resident Expatriate Tax Payer (Inbound)

An inboud expatriate is defined as a person who is temporarily or permanently residing in a country other than that of their citizenship. As South Africa applies a residency based system of taxation, world-wide receipts derived by residents are defined as gross income. For non-residents only receipts derived from sources within or deemed to be within South Africa are subject to tax in South Africa, with certain exemptions. Non-residents are therefore taxed on a source based system of tax.

As the term “source” is not defined in the Act, we refer to case law to determine the meaning of ”source”. In CIR v Lever Brothers & Unilever Ltd (1946 AD), the court held that:

“the source of receipts, received as income, is not the quarter whence they come, but the originating cause of their being received as income and that the originating cause is the work which the taxpayer does to earn them, the quid pro quo which he gives in return for which he received them”

This case therefore states that the word “source” refers to the “originating cause” and the “originating cause” has to be considered on an income specific basis and therefore we focus on income from employment services rendered. The Special Court has consistently laid down that the source or originating cause of income from employment and other services rendered is the services, irrespective of the place where the contract is made or where the remuneration is paid[1]. The source of the remuneration would therefore be located at the place where the services are rendered.

Therefore the taxpayer’s South African source income would only consist of the remuneration earned where the services were rendered in South Africa. Remuneration received for services rendered while the taxpayer was abroad would therefore not be considered South African source income and would accordingly not be taxable in South Africa when taking into account the tax residency of the taxpayer.

The taxpayer should not lose sight of the South African residency rules which are tested by way of being ordinarily resident in South Africa or by way of the physical presence test.

The ordinarily resident test must be applied first and only if the taxpayer is deemed not to be a South African resident through this test, must the physical presence test be applied.

As the term “ordinary resident” is not defined in the Act, case law should be considered in order to conclude on whether the taxpayer is an ordinary resident of the Republic of South Africa. In Cohen v CIR (1946 AD) the court decided that a person’s ordinary place of residence would be the country to which he would naturally and as a matter of course return from his or her wanderings. This approach was confirmed in CIR v Kuttel (54 SATC 298).

In Levene v IRC (1928 AC) it was held that the term “ordinary residence” connotes residence in a place with some degree of continuity, apart from accidental or temporary absences[2]. Thereby a person who visits South Africa who does not maintain a home in South Africa cannot be regarded as an ordinarily a resident of the Republic. Where it is part of a person’s nature to live in a place with a degree of permanence, he must be regarded as being an ordinary resident in that place.

As per the outcome of CIR v Kohen (1992 A) a taxpayer immigrating to the Republic will be treated as being an “ordinary resident” in South Africa and not for the whole year of assessment in which he becomes an ordinary resident.

Considering the applicable case law, in Cohen v CIR, the home country is regarded as the as the country which the taxpayer would naturally return to after his or her wanderings.

A natural person who is not an ordinary resident, will however be considered as a resident if he is physically present in South Africa for certain periods. It is important to note this test should only be applied, where it has been established that a person is not an ordinary resident of the Republic.

The requirements of the physical presence test are set out below.

A person physically present in South Africa for a period or periods:

• Exceeding 91 days in aggregate during the current year of assessment; and
• Exceeding 91 days in aggregate during each of the five years of assessment preceding the current year of assessment; and
• Exceeding 915 days in aggregate during the five years of assessment preceding the current year of assessment (par (a)(ii) of the definition of ‘resident’ in section 1).

A person who becomes a South African resident by virtue of the physical presence test will become a resident from the first days of the year of assessment during which all the requirements of the test are met. Once it has been confirmed that the individual is regarded as a South African tax resident, the individual will be liable for tax on his or her world-wide income from the start of that year of assessment and not only from the day all the requirements were met.

[1] SILKE: South African Income Tax 2011, Residency and source (p56)

[2] SILKE: South African Income Tax 2011, Residency and source (p51)