National Treasury intends to close an anomaly in the Income Tax Act that enables individuals whose tax residency ceases to double dip into certain exemptions and exclusions, according to the 2022 Budget Review.
Currently, where an individual ceases to be a tax resident during a year of assessment, section 9H(2)(b) of the Income Tax Act deems their year of assessment to have ended on the date immediately before their tax residency ceases.
Section 9H(2)(c) provides that the person’s next year of assessment will start on the day their tax residency ceases. In effect, the person may have two consecutive years of assessment in a 12-month period.
This allows a person to claim exemptions and exclusions available within a single year of assessment twice during the 12-month period – once during the first year of assessment, and again during the second year of assessment.
For example, if an individual disposes of a capital asset before ceasing to be a tax resident, any capital gain will be included in the “first year of assessment”. If that person disposes 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”.
That person would be able to reduce their capital gain in their “first year of assessment” by the R40 000 annual exclusion. Furthermore, he or she would be able to reduce their capital gain by another R40 000 in their “second year of assessment”.
To address this anomaly, the Budget Review says the government proposes amending the legislation to apportion both the interest exemption and the capital gains annual exclusion between the two years of assessment.
To continue with the above example, this means the R40 000 annual exclusion will be available only once over a person’s two years of assessment where he or she ceases to be a tax resident. Therefore, the person’s aggregate capital gain over both years of assessment will be reduced by the R40 000 annual exclusion, which is only applied once.