24 February 2022 by and 2022 Special Edition Budget Speech Alert

2022’s ice-cream won’t taste twice as nice: Preventing double-dipping by those ceasing tax residency

Where a person (other than a company) ceases to be a tax resident during a year of assessment, section 9H(2)(b) of the Income Tax Act 58 of 1962 deems their year of assessment to come to an end on the day before the person’s tax residency ceases. Section 9H(2)(c) then provides that that person’s next year of assessment will commence on the day their tax residency ceases. In effect, that person may then have two consecutive years of assessment in a 12-month period.

Previously, this allowed a person to claim exemptions and exclusions available within a single year of assessment twice during a 12-month period – once during the first year of assessment, and then again during the second year of assessment. To prevent this double-dipping, it was proposed in the 2022 Budget Speech that legislation be amended to apportion both the interest exemption and capital gains annual exclusion between these two years of assessment.

An example using capital gains tax illustrates this well. Where a person disposes of a capital asset before ceasing to be a tax resident, any capital gain will be included in the “first year of assessment”. Should that person then dispose of another capital asset after ceasing to be a tax resident, but the capital gain falls within the South African capital gains tax net (say where immovable property is concerned), this capital gain will be included in the “second year of assessment”.

Until now, that person would be able to reduce their capital gain in their “first year of assessment” by the R40,000 annual exclusion. In addition, that person would also be able to reduce their capital gain in their “second year of assessment” by another R40,000 as this annual exclusion is granted per “year of assessment”.

Under the proposal announced in the 2022 Budget Speech, this R40,000 annual exclusion would only be available once over a person’s two years of assessment where they cease to be a tax resident. Therefore, in the above scenario, the person’s aggregate capital gain over both years of assessment would be reduced by the R40,000 annual exclusion which is only applied once.

Any individuals that anticipate ceasing their tax residency in the near future should be aware of this pending amendment as it will affect their tax return declarations.

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