Expats have until now enjoyed a tax exemption in respect of foreign remuneration earned, provided they meet requirements as to time periods worked overseas. The exemption will however be partially removed with new legislation recently passed.
We look at current requirements for exemption, what the new restrictions on the exemption will be, whether they will affect you, when they will take effect, and what you should think of doing about it.
Note: If you yourself don’t employ a working expatriate, or if you aren’t yourself an expat but you know someone who is – a relative, friend or colleague perhaps – please think of passing this article on.
“An income tax form is like a laundry list – either way you lose your shirt” (Comedian Fred Allen)
This article is important to you if you are either a South African working abroad or an employer of one. If you don’t fall into either of those categories, but know someone who does, please think of passing this on.
As an employee earning foreign remuneration (salary, leave pay, bonuses, allowances, commission etc), you currently enjoy an uncapped tax exemption (on that remuneration only, not on other foreign income) provided that you work overseas –
- For more than a total of 183 days during any 12 month period, and
- More than 60 of those days are consecutive.
That however is set to change from 1 March 2020, when only the first R1m p.a. of your earnings will be exempt – you will pay tax on anything over that. With the Rand’s weakness showing little sign of abating, a lot of expats and their employers are going to be affected.
Are you a “tax resident”?
Only “tax residents” are affected, so the first thing you should establish is whether you are still a tax resident or not. That’s not always easy, so take professional advice in any doubt.
To illustrate some of the complexities involved, both physical emigration/relocation and “financial emigration” are different concepts to “tax emigration”. Moreover the Income Tax Act’s tests for tax residency are hardly a model of clarity – you are a “resident for tax purposes” if you are either an “ordinary resident” or a resident in terms of the “physical presence test” –
- You are, says SARS, an “ordinary resident” if South Africa is the country to which you “will naturally and as a matter of course return after [your] wanderings’, your “usual or principal residence”, or your “real home”.
- Even if you aren’t an “ordinary resident”, you will still be a resident under the “physical presence test” if you are physically present in South Africa for more than –
- “91 days in total during the year of assessment under consideration; and
- 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.”
Under the physical presence test however if you are outside the country for a continuous period of at least 330 days you are not regarded as a tax resident.
Should you “tax emigrate”?
If you are indeed a tax resident, don’t think of changing that status without taking full advice. “Tax emigration” and “financial emigration” are complicated processes and full of pitfalls. For example you could be entitled to foreign tax rebates or other relief on your taxable (i.e. +R1m) foreign earnings, or there may be other benefits to remaining a tax resident. So it is important to have an expert look at your specific situation and determine what is best for you overall.
The big thing is to be aware that change is coming. Some long-range planning is the only way to be certain that there are no unpleasant surprises waiting to spring out on you down the line.