How foreign employment income tax will impact South African expats
The current hype into formal emigration being the absolute and final solution to escape the tax consequences of the new #Tax2020 rule has resulted in too many expats South Africans incorrectly opting for formal emigration.
Any expat that is concerned about the pending changes should immediately ask the following question: Did I file all my tax returns up to February 2018 and am I correctly registered as a provisional taxpayer? Being tax exempt does not exempt you from tax filing obligations.
Before one gets overly concerned about the March 2020 [#Tax2020] liability, you need to address the issue of outstanding and overdue tax returns. Anyone impacted by the new rules should have been tax filing with SARS.
If not tax filing for some years, one must ensure you have correctly tax emigrated and paid your exit levy on time. Doing a financial emigration in the current tax year, will not shield you against tax penalties and interest on the unpaid taxes.
Do not believe the fear mongers suggesting you MUST emigrate formally (Financially Emigrate [FE]) to correct non-compliance and to protect you against the new rules. Tax emigration and not financial or formal emigration dictates your SARS exposure
Before we consider all the incorrect and half-truths out there, one should first determine the exact rules, consider the legislature’s intention behind the changes and then only apply it to one or more specific cases. This handrail is not able to address all the typical scenarios. We will, however, attempt to identify three or four typical examples we have seen in recent times.
The new rules affect 1 March 2020
- The rules only apply to tax residents, albeit that they reside outside SA.
- It follows that once you tax emigrated, having told SARS of the exit and paid your exit tax on worldwide assets, you are no longer required to report foreign income (be it remuneration of passive investment income) to SARS.
- For this reason, many expats are keen to tax emigrate, yet sadly they are unwillingly and unnecessarily coerced into financial emigration also known as formal emigration.
- No longer will the full extent of foreign employment income earned be fully tax exempt.
- SA tax residents and only tax residents will, as has been the case in the past, must report the full extent of foreign income to SARS.
- Currently, on assessment SARS will unilaterally tax exempt the total income from tax
- Tax residents spending +183 days outside of South Africa, rendering
- employment services will only be exempted up to the first R1million of their employment income (referred to in the act as remuneration) earned abroad;
- tax residents will still be required to have spent a continuous period of at least 60 full days, rendering employment services outside South Africa, during any 12 months to qualify for the exemption
- Any foreign employment income more than R1 Million will, as of the 2021 tax year, commencing on 1 March 2020, taxed in South Africa, applying the normal individual tax tables.
- The effective tax rate will be determined with reference to the aggregate worldwide income and deemed income, reduced by the first R1 million in respect of foreign income from employment.
- If so taxed on remuneration exceed R1 million, the tax resident will be able to claim a foreign tax rebate with SARS, alternately, the taxpayer can rely on the various tax treaty benefits.
The Treasure Explanatory Memorandum [EM], issued in 2017, justifies and explains the changes as follow:
“Tax residents who spend more than 183 days outside of South Africa rendering employment services will now only be exempted up to the first R1 million of their employment income earned abroad. The R1 million exemption will provide relief for lower to middle-income South Africans working abroad.
“Any foreign employment income earned over and above this amount will be taxed in South Africa, applying the normal tax tables for that particular year of assessment. Residents will still be required to have spent a continuous period of at least 60 full days, rendering employment services outside South Africa, during any 12 months to qualify for the exemption.”
Keywords and tax phrases to be understood
- Remuneration from employment – the word remuneration as used in the SA Income Tax Act, 1961 as amended [ITA], does not define remuneration. SARS Interpretation Note is quick to remind the taxpayers that the 4thSchedule or PAYE rules’ definition is not relevant in the main body of the
- Resident – resident, has been defined for tax and Exchange Control [Excon] purposes, yet either of the two set of rules deals with or refers to the other
- The Excon rules does however deem a non-citizen in possession of a green bar-coded ID or Smart Card ID, to be an Excon Resident
- See the Excon Guide extract below that refers to a permanent resident. Therefore, the Home Affairs decision to grant indefinite residential stay and employment rights has a direct impact on the Excon Resident rules
- There is no reference in the Excon Resident definitions speaking to tax residency, and vice versa.
- Tax resident – Although the actual law changes do not refer to residents, it is trite law that only tax residents can and need to claim the foreign income exemption, as foreign income of a tax non-resident is not subject to our ITA; yet
- tax resident does not include any person who is deemed to be exclusively a resident of another treaty country; provided
- that where any person that is a resident cease to be a resident during a year of assessment, that person must be regarded as not being a resident from the day on which that person ceases to be a resident
- Emigrant, nor non-resident is defined in the ITA, yet
- For purposes of Excon is defined as South African resident who is leaving or has left South Africa to take up permanent residenceor has been granted permanent residence in any country outside the CMA
- Excon Resident – as defined and deemed in terms of Excon manuals
- Resident, for formal emigration [FE} purposes means any natural person who has taken up permanent residence.
- For the purpose of the Authorised Dealer Manual, any approved offshore investments held by South African residents outside the CMA, will not be Excon resident
- However, such entities owned by Excon Residents (albeit a company in SA) remains subject to Excon rules and regulations
- Excon non-resident – as defined in the Excon manuals issued by SA Reserve Bank [SARB]
- Non-resident means a person (i.e. a natural person or legal entity) whose normal place of residence, domicile or registration is outside the CMA
- Emigrants mean a South African resident who is leaving or has left South Africa to take up permanent residence or has been granted permanent residence in any country outside the CMA.
- From practical experience, we know SARB may allow, say UAE based expats to formally emigrate, despite them not being able to register as a permanent resident of UAE or say Dubai.
- Non-residents for Excon purposes include:
- Any natural persons from countries outside the CMA who are temporarily resident in South Africa, excluding those on holiday or business visits, i.e. a person on work visas or retiree visa and in most cases persons on a spousal visa without the right to seek local employment.
Article by Hugo van Zyl, 2019-01-29