By Liam Aspeling – Sentera Business Partners
The term “expat tax” refers to the new amendments to the Income Tax Act which came into effect from 1 March 2020, will impact thousands of South Africans working and living abroad.
Previously, if you were a South African tax resident rendering services outside the country on behalf of an employer, these earnings would be exempt from income tax, provided you were outside the country for longer than 183 days during any 12-month period and a continuous minimum of over 60 days.
Following the amendment, you will only receive a break on the first R1.25 million earned abroad.
Since 1 March 2001, South Africa follows a residency-based tax system, which means that South African tax residents would be subject to tax on worldwide income, excluding certain exemptions or exclusions, and non-residents would be subject to tax on income from a source within South Africa.
The exemption of foreign earnings was introduced to prevent double taxation for South African’s working in another country, but this created the opportunity for ‘double non-taxation’ where South Africans were working in countries with low- or no-income tax. It was therefore decided to impose a threshold of R1.25 million on the exemption.
Are you a tax resident?
You can be a resident for tax purposes in South Africa either by way of ordinarily residence or by way of physical presence. The concept of “ordinarily residence” is not clearly defined, but the courts have interpreted the concept to mean the country to which an individual will “naturally and as a matter of course return after his or her wanderings”. It could be described as that individual’s usual or principal residence, or his or her “real home”. For example, if you have financially emigrated, but you own a residence in South Africa, and your spouse and children remain in South Africa, then it is clear that South Africa is the country that you intend to return to from your “wanderings”.
Breaking tax residence
In order to no longer be a South African tax resident, you will need to prove that you comply with the physical presence requirements as well as facts surrounding being “ordinarily residence”, as discussed in the previous section.
There is a common misunderstanding about financial emigration. Financial emigration through the South African Reserve Bank is not connected to your tax residence and is merely one factor that may be taken into account to determine whether or not you broke your tax residence.
On breaking your tax residence, it is important to note that you will be deemed to have disposed of all your worldwide assets, excluding South African immovable property, at market value on the day before breaking residence, known as “exit charge”, resulting in Capital Gains Tax (CGT). If you own assets which have grown significantly in value since acquisition, this could be a very costly exercise. It should also be noted that you will also still be liable to pay tax on any South African-sourced income.
Double taxation and relief thereof
If you earn employment income in excess of R1.25 million and the double tax agreement (DTA) between South Africa and the foreign country, if any, does not provide a sole taxing right to one country, both countries will have a right to tax the income. A DTA is the agreement between two countries to resolve double taxation issues. The portion of the income in excess of R1.25 million may end up being double taxed.
Section 6quat, of the Income Tax Act may come to your rescue with some double tax relief. Section 6quat is the mechanism to claim relief from double tax where the amount received for services rendered outside of South Africa is subject to tax in South Africa and in the foreign country. Provided you meet the specified requirements, SARS will allow you to deduct the taxes paid in the foreign country against your South African normal tax so that no double tax is ultimately suffered.
For example, if you earned R3 million in a foreign country, and paid 20% tax (R600,000) in the foreign country, you will be be taxed on R1.75 million (R3 million less R1.25 million exemption) in South Africa and your tax payable of R622,000 will be reduced by the R600,000 foreign tax paid, resulting in R22,000 payable.
Based on the above, if you are not working in a country that is not a tax jurisdiction with low or no taxes, then you will likely find that the impact on your South African tax liability is minimal, however if you are working in a tax jurisdiction with low or no taxes and without a favourable DTA, you could end up with a large tax bill.
What is included in income for this exemption?
Should your company provide you with benefits such as housing, schooling or security costs, these benefits will be considered when calculating your tax liability in South Africa, although these may not be taxable in the foreign country. These benefits could utilise a large portion of your R1.25 million exemption.
Not planning or not taking the appropriate actions could result in an unexpected tax liability for South Africans working abroad, we advise that you consult with a registered tax practitioner in order to determine how this change will affect you.