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Typical Double Tax Treaty Misconceptions


Typical issues we deal with on tax emigration:

United Kingdom / South Africa DTA

  1. Tax residency change not timeously reported to either SARS or HMRC

    Most client suggest that they need file or report their SA income to the UK tax authority as they were non-domiciled in the UK and as the lump sum was not remitted to the UK, they need to pay UK tax on the lump sum income. No, says HMRC although you are non-domiciled you are subject to UK tax on lump sums received in SA, albeit not remitted to the UK, as lump sums are taxed on the arising basis and not on the remittance basis. In short, you cannot defer UK tax on the lump sum arising in SA, by sending said lump sum to Channel Islands, USA or EU nor can you escape the UK tax exposure by keeping the lump sum in your blocked account in South Africa.

  2. The treaty dictates that lump sum received from South African fund managers on retirement annuity fund (RA) lump sums or pension/preservation funds, are tax exempt in SA and UK taxed only

    This argument is most often presented to us by clients having called the HMRC call centre. We do not know how the client explained the situation to the HMRC call centre but suffice to say the answer is incorrect. The fact that HMRC refers you to Article 17 of the treaty is not adequate as the said article does not deal with lump sums. Article 17 specifically states that for purposes of the agreement an annuity taxable in the new home country only, is a fixed amount paid on a regular basis. You need not be tax lawyer to understand why the lump sum will never fall into this category of treaty exempt (in SA) annuity payments.

  3. All monthly annuity or pension received from either a living annuity or a pension fund, established in South Africa and contributed to whilst tax resident in South Africa is automatically tax exempt in SA

    I wish the answer was so easy. Yes, the fixed monthly annuity paid from or by a SA fund, is in most cases tax exempt but in several other cases it not tax exempt. Although the treaty may exempt you from SA tax, there is no obligation on the SA fund manager to cease with the PAYE (pay as you earn payroll withholding tax in SA) as they are not able to determine or verify your tax residency status. It is for SARS (in conjunction with HMRC in certain cases) to confirm your tax status as non-resident which will then allow for the PAYE deduction to be determined. The exemption process, which then also includes the refund process should you claim the tax exemption on tax filing only, includes obtaining a TRC (tax residency certificate) in the UK issued by HMRC, the completion of SARS form IT24 to be filed initially with and another original copy duly date stamped by HMRC, being filed with SARS in South Africa. Now only will SARS issue the PAYE exemption letter (as there is currently no provision for said exemption within the tax directive process found online and used by fund managers i.e. lump sum and fixed percentage tax deductions applicable to their own commission agents). Clients often prefer to claim a refund on assessment only in which case the client needs to send same TRC and proof of foreign residence to SARS, file the annual IT12 tax return and claim the necessary exemption and tax refund in SA.

Australia / South Africa DTA

  1. Australia is my habitual home and therefore I am Australian Tax Resident and not subject to SA taxation – close down my SARS tax numbers

    Sadly it is not that easy. First of all, gross income in SA tax law refers to income of a tax non-resident sourced from or deemed to be sourced in SA. Being gross income, you have to file and claim the tax exemption or tax deduction as tax filing obligation is based on gross income level and not taxable income level. It is also important to note that not all South Africans living in Australia is exclusively tax resident in Australia as they fail to understand there being two types of tax residents in Australia. Without being too technical, the first group (all on PR) is tax resident in Australia reporting worldwide income to the ATP. The second group is tax resident reporting only Australian sourced income to the ATO, where a salary earned in Australia yet paid from a SA company in respect of a contract of employment in SA, is deemed to be Australian sourced as you are performing your duties in Australia. The latter group are typically work permit or 4 year 457 visa workers. They need not report their SA CGT events and interest to Australia but equally their SA interest is NOT tax exempt in SA. The reason being the tax treaty with Australia excludes from Australian tax resident definition any person paying tax to Australia on Australian sourced income only. Yes, 457 expats are normally exclusively tax resident in SA for as long as they are waiting for the PR (permanent residence permit) to be issued. This said, you will then be obliged to declare your Australian sourced income to SARS, yet you may claim a tax credit i.r.o. ATO taxes paid and in certain cases you may even qualify for the 183/60 day exemption. Finally, the last hurdle that triggers the habitual tax resident is that the Australian treaty with SA, does NOT refer to habitual tax residents. Yes, it may be in the all the other RSA treaties, the decisive treaty tie breaker but is does not apply to South Africans living in Australia. No need nor any benefit in counting days to show you habitually tax resident in Australia. As long as you have a 457 you are exclusively tax resident in SA and once you obtain a PR in Australia but kept you holiday home, your farm or your caravan in SA, you are at risk of being treated tax resident in SA. For taxpayers with a permanent abode or home available to them in both countries or in neither, will be deemed to be tax resident in the country where there centre of vital interest is. Well that is a topic of a doctorate but suffice to say, until you formally emigrated or removed all but all you assets and most of your family from SA, your centre of vital interest is probably SA and you will remain exclusively tax resident in South Africa. Confused? We understand, feel free to contact writer for a more detailed analysis of your personal circumstances as generalisation is the biggest mistake a tax adviser can make. The above rules are thus a high level overview without the intention to generalise, yet you best advised to approach an experience and reputable tax adviser in either SA or Australia.

  2. All monthly pensions and or annuities from retirement funds are tax exempt in SA and taxable in Australia only

    This is not true as pension from government and living annuities bought from funds not earmarked as retirement funds, are normally taxable in SA, with or without ATO having the right to tax again.

  3. South African companies should not withhold dividend tax on my dividends and no PAYE on my RA lump sum as I am tax non-resident in SA and tax resident in Australia

    The treaty or DTA covers this in detail and although tax rates may be capped, the treaty specifically allows SA to tax at source despite you being tax non-resident. The ATO will duly credit you with the SARS taxes paid.

  4. I do not need to report my SA discretionary trust to the ATO (their SARS) as I have not received any benefit from the SA trust. It holds not assets in Australia.

    Wrong. Under the ATO’s transferor trust measures, residents of Australia (immigrants included) who have transferred property (including money) or services to a non-resident trust, will be taxed in Australia on the accrual of certain profits derived by the foreign trust. The reference to transfer of property or services to a trust includes the transfer of property or services by way of creation of a trust or funding of a trust in say South Africa. Section 99B (Australia) can also assess amounts paid to, or applied to the benefit of, a resident beneficiary of a foreign trust estate; for example, it can apply to distributions out of accumulated foreign income or gains of the trust. In short the ATO ignores the SA concept of discretionary trusts and will always tax the funder unless the beneficiaries were taxed on some of the trust income. Do note the section 96A FIF fund rules were abolished and beneficiaries are not always taxed on their growing expectation pot of gold. There is no provision to limit the above to Australian trusts or assets held in Australia. It covers worldwide trust, created before and after tax immigration to Australia.

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