Foreign Income Exemption - South Africa

The tax proposal which caught the public’s eye last year was the

removal of the foreign income tax exemption.

 

In terms of section 10(1)(o)(ii) of the Income Tax Act,

South African residents are entitled to an exemption for

remuneration received or accrued with respect to services

rendered outside South Africa, provided the South African

resident was outside South Africa for more than 183

days during any 12-month period and 60 of these 183 days

were consecutive. National Treasury has proposed to limit this

exemption to the first R1 million of eligible South Africans’ foreign

remuneration with effect from 1 March 2020.

 

Only a handful of South African citizens rely on the tax exemption.

The worst affected will be those temporarily working in low- or zero-tax

jurisdictions (which commonly do not have treaties with South

Africa) and earning more than R1 million per annum. For them,

this change will be a bitter pill to swallow, but nothing is stopping

them from emigrating, which is clearly going to be a possible

consequence of limiting the exemption.

 

5 FOREIGN INCOME EXEMPTION QUESTIONS:

 

  1. When can SARS tax my offshore income?

South Africa taxes its residents on a worldwide basis, while

non-residents are subject to tax in South Africa on South African

source income and only certain capital gains from a South

African source.

SARS can, therefore, only tax you on a worldwide basis (which

includes your foreign earned salary) if you are a South African tax

resident.

 

Thus, the starting point for your South African tax liability would

be your tax residence status.

A natural person is regarded as tax resident in South Africa if he

or she is:

  • “Ordinarily resident” in South Africa; or
  • Not ordinarily resident, but spends a certain amount of time

(determined in terms of the physical presence test) in South

Africa, provided that he or she is not a treaty resident in

another country which is party to a double tax agreement

(treaty) with South Africa. If he or she is a treaty resident,

the treaty residence would override South African residence

rules.

 

  1. What constitutes a South African tax residence?

Ordinary residence means the place where a person eats, sleeps

and works with some degree of continuity and permanence. Your

ordinary residence is the country to which you would naturally

and as a matter of course return. Note that ordinary residence

is a question of fact and is not solely determined by the amount

of days spent in a jurisdiction (as is the case with the physical

presence test), but rather where a person’s deepest roots are

held.

If you are not ordinarily resident in South Africa, you could still

qualify as being a South African tax resident in terms of the

physical presence test, if you:

  • Are physically present in South Africa for more than 91 days

in aggregate during the relevant tax year;

  • Were physically present in South Africa for an aggregate

period exceeding 915 days during the preceding five tax

years; and

  • Were physically present in South Africa for more than 91

days in aggregate for each of those five years.

 

  1. How does my tax situation work?

 Even if you are still somehow considered to be ordinarily resident

in South Africa, but you live in a country such as the UK which

has a double tax treaty with South Africa, you will most likely be a

treaty resident in the UK if that is where you live, work and reside

with your family. In such a case, South Africa will have no taxing

rights whatsoever on your non-South African source income or

gains.

For those working in countries that do not have treaties with

South Africa, there will be no tie-breaker to rely on and South

Africa will, unfortunately, continue to have taxing rights, unless

you actually cease to be a South African tax resident.

In short, the change to the exemption contained in section

10(1)(o)(ii) of the Income Tax Act will have “no effect” on you, if:

  • You have ceased to be a tax resident in South Africa; or
  • You are ordinarily resident in South Africa as well as resident

in a treaty country where you work, but the treaty tie-breaker

breaks in favour of the treaty country.

 

  1. Should I emigrate?

 Apart from a potential deemed capital gains tax exit charge (see

below), emigration could suit many South African residents who

already do not spend more than 183 days in South Africa. If, with

careful planning of days (and remembering that part of a day is

counted in full), you ensure that you are not in South Africa for

more than 90 days in the tax year after you cease your South

African tax residence, you can spend up to 183 days in South

Africa for the following five tax years without being resident under

the physical presence test. You will then just have to ensure

that you do not “revive” your ordinary residence and/or remain a

treaty resident outside South Africa.

There is a catch to emigration, however, in the form of a deemed

capital gains tax exit charge which is triggered under section 9H

of the Income Tax Act upon ceasing to be a South African tax

resident. Or, if you hold assets as trading stock, which is quite

uncommon, the section 9H charge can also be an income tax

charge.

This means that you would be deemed to dispose of all your

assets for their market value on the date immediately before the

day on which you cease to be a South African tax resident and

to have reacquired those assets immediately after the date of

disposal at the same market value. This will result in a capital

gains tax charge of up to a maximum effective tax rate of 18%.

It is, however, important to note that the capital gains tax exit

charge will not apply to cash, immovable property in South

Africa, assets of a South African permanent establishment and

certain equity instruments granted by reason of employment.

Please be aware that exchange control residence is a separate

concept to tax residence and has its own formal procedures to

comply with upon a financial emigration via the SARB.

 

 

  1. What are the consequences for a South African

resident working abroad?

 If you still qualify as ordinarily resident in South Africa, while

employed abroad, the change to section 10(1)(o)(ii) will only affect

you if you work in a jurisdiction with a lower tax rate than South

Africa and earn more than R1 million per annum.

You will, however, be able to get a credit for the tax, if any, paid in

that lower tax jurisdiction, but will have to pay tax in South Africa

on the balance (i.e., up to the tax you would have had to pay if

the services were rendered in South Africa). Also, be aware of

exchange rate differences.

We appreciate that South African tax residents working in low

tax jurisdictions could be left high and dry, as they will now be

required to pay up to the South African income tax rates on the

portion of their foreign salaries in excess of R1 million and will

essentially not be able to receive any form of credit for their high

living costs in the low tax jurisdiction. Therefore, there will most

likely be an increased desire to emigrate for tax reasons and, as

pointed out above, that may well be an achievable result with

little downside.

If, however, you are a South African tax resident working abroad

in a higher tax jurisdiction (e.g., the UK), the change to the

section 10(1)(o)(ii) exemption will not really have a financial impact

on you, apart from a potential administrative burden. The reason

being that you will be able to claim a credit for the tax paid in the

country where you are employed, which will often be more or

equal to the tax that you would have paid in South Africa.

Finally, if you live and work in one of the 78 countries with which

South Africa has a tax treaty and are deemed resident in that

country, the change to the section 10(1)(o)(ii) exemption may not

affect you at all.

Last modified on Thursday, 18 January 2018 11:21
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