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:
- 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
SARS can, therefore, only tax you on a worldwide basis (which
includes your foreign earned salary) if you are a South African tax
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
- 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
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
- Were physically present in South Africa for more than 91
days in aggregate for each of those five years.
- 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
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.
- 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
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.
- 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
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.