The past two years have seen far- reaching changes to SA's tax system. The implications have yet to be digested and understood by taxpayers accustomed to a simpler system.

The introduction of foreign dividends taxation was followed by the replacement of the source basis of income tax with a residence basis. For tax years starting on or after January 1 2001, SA residents became subject to income tax on their worldwide income.

The tax year ending February 28 2002 is therefore the first year that individuals completing tax returns will be confronted with the complexities of the new system. Corporate taxpayers are affected from the beginning of financial years starting after December 31 2000. Nonresidents remain liable for tax in SA on their actual or deemed source income.

The cornerstone to the residence basis is the definition of a "resident". For individuals, two tests will be applied to determine residence. Under the first, if a person is ordinarily resident he or she will automatically be an SA resident for income tax purposes.

"Ordinarily resident" hasn't been defined but the courts have interpreted it as the place where a person would return to, from his or her wandering and that could be regarded as his or her true home.

The test refers to the intention or state of mind of the individual rather than physical presence.

Its application is likely to create difficulties. Taxpayers who have physically left the country and subsequently returned after a period of time will argue that there had been a change of intention and that, upon departure from the country, they ceased to be ordinarily resident in SA.

The second test is applied if an individual is not ordinarily resident in SA. It examines physical presence to determine whether he or she is resident. An individual who was not at any time ordinarily resident in SA in a tax year is regarded as resident if he or she was physically present:

• For more than 91 days in the current tax year and in each of the three previous tax years; and

• For a period of more than 549 days in the three previous tax year.

Continuous daily presence is not required and the 91- and 549-day periods are counted in aggregate. Presence for part of a day will count as a full day.

When an individual is absent for a continuous period of more than 330 full days after he or she physically left SA, they will be regarded as nonresident from the date of physical departure from the country.

Individuals may be regarded as a resident of more than one country with a potential tax liability in both countries. These problems are usually resolved by a double tax agreement or, if no agreement is applicable in a specific situation, SA grants unilateral relief by way of a credit given in SA for foreign taxes paid.

Where a resident derives remuneration for services rendered outside SA for an employer, for more than 183 days, they will be exempt from SA income tax.

SA residents will, for the time being, be exempt from SA tax on foreign pensions received provided these relate to past employment outside SA and are not deemed to be from an SA source. Social security payments from foreign governments are also exempt from tax.

Where the taxpayer can prove foreign tax was paid on foreign income, which is also taxable in SA, credit is granted against the SA tax liability and excess foreign tax credit may be carried forward.

Capital Gains Tax (CGT) was introduced on October 1 2001. Residents, both individuals and companies, are subject to CGT on worldwide assets while nonresidents will only be subject to CGT on the disposal of immovable property or an interest in or right to such property.

Assets of a nonresident, which belong to a permanent establishment through which trade is carried on in SA, are included.

Broadly, if an asset is disposed of and the proceeds are not subject to income tax, the difference between the proceeds and the base cost must be determined.

Unless the capital gain or loss is excluded or disregarded or deferred, it is aggregated with all other capital gains and losses realised in the year. Assessed capital losses, brought forward from the previous year, are added to the current net loss, if there is one, and carried forward to the following year.

If, after deducting the assessed loss brought forward from a previous year, there is a net capital gain, this gain is multiplied by the inclusion rate (25% in the case of individuals and special trusts and 50% in the case of companies). It is included in taxable income, at the individual's marginal tax rate or 30% in the case of a company.

The distinction between capital and revenue gains has given rise to many debates between taxpayers and Revenue and will continue to do so because the effective tax rate, applied to capital gains, is lower than that applied to revenue gains.

It remains important for taxpayers to establish that the gains are of a capital nature. For example, the disposal of a gold coin will be subject to CGT unless it is disposed of in the course of speculating in gold coins in which case the gains would be subject to income tax.

Complicated rules are applied to establish the base cost of assets and to ensure that, in the case of assets acquired before the introduction of CGT but disposed of after October 1 2001, taxpayers are only taxed on the portion of the gain in value which occurred after that date.

Certain gains arising on the sale of assets are excluded from the tax net. Most important for individuals are gains arising on the sale of personal use assets, retirement benefits, proceeds from long-term assurance policies, small business assets (total lifetime gain R500 000) and certain types of compensation for personal injury and so on.

Of great importance for individuals and special trusts is the right to have the first R1m of the gain made on the sale of a primary residence excluded. Various rules are applied to determine whether a residence will qualify as a primary residence and only one residence can qualify.

Taxpayers will be required to include information on disposal of assets during a tax year. They will also have to retain important records, to determine gains or losses for four years from the date of submission of their tax returns.

Payments of provisional tax will be affected by CGT. Taxpayers will continue to base first and second provisional payments on the basic amount. But to avoid incurring interest, the third provisional tax payment should take account of any gains subject to capital gains tax.

Where a taxpayer has elected the market value for revaluation of an asset acquired before October 1 2001, a valuation must be performed before September 30 2003. Proof of valuation must be submitted with the return in which the disposal is declared or, in certain cases, with the first tax return submitted after September 30 2003. Taxpayers should not be caught unawares.