Basis of taxation

Residence rules
Highlights
South African residents are subject to tax on their worldwide income while non-residents are subject to tax only on income from a South African source or deemed to be from a South African source.

The rules
Subject to the various double tax agreements which South Africa has entered into with other countries, a person other than a natural person (and therefore including a company and trust) will be a resident of South Africa if it is incorporated, established or formed in South Africa or if it has its place of effective management in South Africa. Generally the place of effective management is where the high level executive decisions are taken. This is not necessarily where the board of directors or trustees meet to conduct the business of the company, but is more likely where the executive directors/trustees fulfil their functions.

A natural person (i.e. an individual) will be a resident of South Africa if he or she is ordinarily resident in South Africa. This means that South Africa is the place where he or she has his or her real home or principal residence or, as the courts have poetically put it, South Africa is the country to which the person would naturally and as a matter of course return after his or her wanderings. Even if a natural person is not ordinarily resident in South Africa, he or she can still be a resident if the physical presence test is met. This means that the person must be physically present in South Africa:

• for a period or periods exceeding 91 days in aggregate during a tax year;
• for a period or periods exceeding 91 days in aggregate for each of the five previous tax years;
• for a period or periods exceeding 915 days in aggregate during such five preceding tax years (this works out to an average of 183 days per year).

In calculating the number of days, both the dates of arrival and departure are included but days spent in transit through South Africa are excluded if the person does not formally enter South Africa. The above provisions apply in respect of the year of assessment commencing on or after 1 March 2006.

If a person is a resident by reason of the physical presence test and then leaves South Africa, he or she is deemed to have given up residence from the date of leaving provided that he or she is physically outside South Africa for a continuous period of at least 330 full days following departure. (In the case of a person who is a resident under the ordinary residence test, he or she will cease to be a resident once South Africa ceases to be his or her real home.) The definition of ‘resident’ excludes persons who, for the purposes of double tax agreements, are deemed to be residents of the other contracting state exclusively.