The pandemic has affected us all in numerous ways. Even National Treasury and SARS have made some concessions, particularly regarding provisional tax estimates. One area they haven’t addressed is the physical presence test in the definition of “resident” in the Income Tax Act.
A natural person may qualify as a tax resident in two ways: by being ordinarily resident in South Africa; or by being present in South Africa for more than a certain number of days over a six year period. The pandemic does not affect the ordinarily resident test; it is in the physical presence test that problems can arise.
The ordinarily resident test is subjective. If you consider South Africa to be your ultimate home, you are ordinarily resident here. In Cohen v CIR [1946] 13 SATC 362, Schreiner JA described the concept thus in determining where a person is ordinarily resident: “But 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”. So a person who leaves South Africa and remains abroad for many years would still be ordinarily resident here if he intended one day to return, because he considered this to be his “real home”. The immediate income tax consequence of being ordinarily resident in South Africa is that you are taxable on your worldwide income, with limited provision for credit for foreign taxes on income also taxed in South Africa. It seems unlikely that the pandemic could disturb this test of residence, because however long you are stuck in another country, you remain ordinarily resident for so long as you consider South Africa to be your “real home”.
They physical presence test, by contrast, can be affected by the impact of the pandemic of a person who is not ordinarily resident here. The test has three parts, each of which must be met before the person meets the test and becomes a tax resident. These parts are that you must have been physically present in South Africa, and not at any time ordinarily resident:
- in the present year of assessment, for more than 91 days; and
- in each of the preceding five years of assessment, for more than 91 days; and
- in those preceding five years of assessment, for more than 915 days in the aggregate.
For the “swallows” who spend their summers in their holiday homes here and depart for northern climes during our winter, this test is crucial if they wish to avoid qualifying as tax residents. A common question they pose is, “What is the maximum number of days I can spend in South Africa each year without qualifying under this test?” The answer is 182 days, the reason being that the person would qualify under (a), and (b), but never under (c), because 5 times 182 is 910; just short of the 915 day limit.
And here is where Covid-19 rears its ugly head. Assume you are ordinarily resident in Europe. For the past decade you have been arriving in South Africa in mid-October and leaving in early April to be home in time for Easter and the northern summer after enjoying the Cape climate in your Llandudno cottage. Each year you meet the (a) leg of the test. For the past five years you have been meeting the (b) leg. But you have made sure each year to return home 182 days since your arrival in the preceding October. However, along comes lockdown. As you start packing and tidying the cottage in the weeks before your departure, you suddenly find that the country is in quarantine. Flights are cancelled, shipping is cancelled, and there you are, watching the calendar and counting the days. Your 182 day limit comes and goes and now, through no fault of your own, you have met the (c) leg. You are now a tax resident of South Africa, subject to tax on your worldwide income. It doesn’t avail you to argue that it was through no fault of yours that you were unable to depart in time; the physical presence test is not subject to SARS discretion; it is peremptory. and SARS has announced no relief from this unfortunate situation.
The potential danger with the physical presence test is not confined to this hopefully temporary period in which we find ourselves. A person who has been complying with the day counting requirements could become ill or injured and be confined to hospital for a few weeks, enough to tip her over the 182 day limit. Here again, she cannot be heard to contend that she should not be penalised through no fault of hers.
Fortunately, relief may be available through the double tax treaty network. South Africa has treaties with more than 80 countries. If you are, for example, ordinarily resident in the United Kingdom in terms of the UK tax laws, that status will be recognised by the treaty between South Africa and the UK. Your UK status will trump the South African definition of “resident”, because double tax treaties take precedence over domestic law.
In general, we should advise our swallows clients not to cut their travel plans to finely if they wish to avoid stumbling into tax residence status in South Africa.