The South African government is making a move towards changing its tax on remuneration earned outside South Africa – which could see some expats pay as much as 45% on earnings over R1 million outside of South Africa..
BusinessTech quotes Tax Consulting SA who says the South African National Treasury has already invited key stakeholders to a workshop next month (March 2019) to address concerns around the planned regulations, which opens up the way for possible tweaking and changes ahead of the planned implementation date of new tax legislation for expats next year (March 2020).
Experts is of the opinion that there is no way out of the government’s plans to to tax foreign income of SA expats. They say even if the draft laws are changed in some way or another before implementation, the gist of if will remain the same – to milk the wealth of those who have left the country to build a better future.
What happens at the moment?
Currently, reports BusinessTech.co.za, South Africans who are earning income abroad are assessed in terms of residency.
In terms of section 10(1)(o)(ii) of the Income Tax Act, if you are working overseas and do not meet the physical presence requirements to be an ordinary resident in South Africa, you are exempt from tax on any foreign income.
Now this is changing. Originally, the draft regulations proposed the complete repeal of section 10(1)(o)(ii) of the Income Tax Act – the section that deals directly with taxation on foreign remuneration.
Under these conditions, all foreign income would have been taxed by SARS, and citizens would have to claim a credit against South African tax payable for any foreign taxes paid on that foreign income.
The draft regulations were later softened to not be a complete repeal, but that section 10(1)(0)(ii) be changed so that only the first R1 million of foreign remuneration will remain exempt from tax in SA – even if an individual meets the requirements of exemption.
One of the main reasons given for the changes is to curb situations of double non-taxation – being situations in which an individual’s employment income is not subject to tax in either South Africa or in the foreign country where the services are rendered.
Will you be affected?
The proposed changes will affect all South African employees who are earning an income overseas, taking home more than R1 million a year.
It will also impact companies that send employees overseas for work, who will have to deal with the new tax implications.
South Africans who have permanently left the country, who have not settled their tax affairs (through financial emigration) may also be subject to the changes, depending on their individual circumstances.
Young people, or anyone who is travelling and working abroad who qualify for exemption under section 10(1)(o)(ii) will remain exempt, provided they earn less than R1 million in the year.
And if you are living abroad permanently?
The tax changes could also impact people who are permanently living abroad, who currently qualify for exemption based on section 10(1)(o)(ii). These South Africans are typically not ordinarily resident in South Africa, but may have assets in the country, which could impact how SARS sees their tax affairs.
SARS has a set guideline – called the physical presence test – to determine whether a South African is resident, based on physical presence in the country.
This is for a period or periods exceeding:
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
An individual who fails to meet any one of these three requirements will not satisfy the physical presence test. In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident from the day on which that individual ceased to be physically present,” SARS said.
If an individual passes the physical presence test, they will be taxed on their worldwide income in South Africa.
Is financial emigration necessary?
BusinessTech quotes Sable International who is of the opinion that financial emigration – being the legal process of cutting all tax ties to South Africa – may not be necessary to avoid the expat tax, provided you meet the right requirements.
If you are a non-resident (South African living abroad) and can prove to SARS you are ordinarily resident in the country you’re living in, then the tax should not apply.
If you are in a dual-residency situation, SARS may have a deal with the country you’re living in that may make you exempt.
However, this is specific to each individual situation, with no real general exemption that applies to all expats outside the section 10(1)(0)(ii) limits.