03 April 2025
Tax is not a subject that is easy to understand. Below we debunk some common tax myths that could impact your clients’ financial decisions.
1. Myth: Tax residency is dependent on your citizenship
Facts:
The tax definition of “resident” does not rely on citizenship. Citizenship is legal status that grants one the right to live and work in a specific country. Tax residency, however applies to the country where you are subject to tax and it is not dependent on one’s citizenship. In South Africa you can either be ordinarily tax resident or you can be tax resident by means of the physical presence test.
- Ordinarily resident test
- The courts have interpreted the concept “ordinarily resident” to mean the country where an individual has his/her usual or principal residence, that is, what may be described as that person’s real home.
- Physical presence test
- A natural person, who is not ordinarily resident in South Africa at any time during a year of assessment but meets all three requirements of the physical presence test, is considered a resident for that year. The number of days of physical presence in South Africa exceeding –
- 91 days in aggregate during the relevant year of assessment;
- 91 days in aggregate during each of the five years of assessment preceding the relevant year of assessment; and
- 915 days in aggregate during those five preceding years of assessment.
- A natural person, who is not ordinarily resident in South Africa at any time during a year of assessment but meets all three requirements of the physical presence test, is considered a resident for that year. The number of days of physical presence in South Africa exceeding –
2. Myth: You do not need to declare income or capital gains earned outside of South Africa to SARS
Facts:
South Africa has a residence-based tax system which means that:
- South African tax residents are taxed on their worldwide income, irrespective of where it is earned.
- Non-residents are taxed on their South African-sourced income. South African tax residents must declare any income or capital gains earned outside of South Africa to SARS.
3. Myth: Once you leave South Africa, you can immediately access the capital in your retirement funds and your compulsory annuity policies.
Facts:
- As of 1 March 2021, a retirement fund member must provide evidence that they have not been tax resident in South Africa for an uninterrupted period of three years or longer, before access prior to retirement will be granted to the vested and of their retirement annuity fund or ‘restricted’ preservation fund (i.e. once-off withdrawal from the has already taken place).
- The three-year rule does not apply to annuities. Annuities are therefore not commutable upon cessation of residency. Annuity income will be paid by the insurer into a South African bank account and will be subject to normal tax in South Africa. Being declared a non-resident by SARS does not relieve the non-resident from paying tax on the annuity income. A non-resident may, however, apply for a directive for relief from South African tax for pension and annuity income, in terms of a Double Taxation Agreement.
4. Myth: There is no benefit to overcontributing to a retirement fund (i.e. contributing more than the lower of 27.5% or R350 0000) in a tax year.
Facts:
Any amount contributed to an approved retirement fund which is disallowed solely because it exceeds the amount of the deduction that is allowable in respect of that year of assessment will be carried over to the following years of assessment, and can be applied to reduce:
- the taxable income in the following year of assessment (as per Section 11F),
- the taxable portion of retirement fund cash lump sums (as per the Second Schedule), or
- the taxable portion of compulsory annuity income payments (as per Section 10C)
5. Myth: Non-resident investors are not taxable on income sourced from South Africa (“Because I have confirmation in writing from SARS that I am a non-RSA resident, I am not taxable on income sourced from South Africa”).
Facts:
- Regardless of being a non-resident investor, income (such as from an annuity) sourced in South Africa remains taxable in South Africa
- If an amount received by a non-resident constitutes a lump sum, pension or annuity, and the services in respect of which that amount is received or accrued were rendered in South Africa, that amount is subject to normal tax in South Africa.
- The provisions of a double taxation agreement (DTA) may affect the taxability of an annuity in South Africa, but then the SARS rules in relation to the DTA must be adhered to.
- If a DTA does not exist between 2 countries, South African income will remain taxable.
6. Myth: All income is taxable according to your marginal rates.
Facts:
- Income is taxable according to the Pay-As-You-Earn (PAYE) tax scales.
- The PAYE scales take the rebates and varying marginal rates applicable to each bracket into consideration.
- A client younger than 65 with an income of R513 000, for instance, which falls into the 31% marginal tax bracket, is taxed at an average income tax rate of 11.73%.
- In advice context, the average tax rate should be taken into consideration.
- Although this client’s total income falls in the 31% marginal rate, such a client would be overtaxed if invested in a policy with an income tax rate of 30%, as the actual (average) tax rate is only 11.73%.
