In 2017, National Treasury announced that there would be changes to the Foreign Employment income Exemption. These changes were intended to target those South Africans working overseas on expat contracts, who had not formally emigrated and were intending to return ‘home’ to SA at a later stage. The proposed amendments would have seen South Africans working overseas in low or zero tax jurisdictions where they pay little or no tax on employment, subject to tax in South Africa.
This announcement sent shockwaves through the South African expat community, many of whom were escaping the tax net in South Africa by claiming the s10(1)(o)(ii) exemption, and then benefitting from more favourable tax regimes (compared to South Africa) abroad.
Treasury has since clarified their stance and from 1 March 2020, South African residents who spend more than 183 days working outside the country will be subject to South African tax on foreign employment incomeexceeding R1m.
As part of our efforts to always assist taxpayers in simplifying changes, which could affect them, we’ve identified three examples of types of taxpayers that this new law will apply to:
1. South Africans who have gone overseas for a short-term transfer and who intend to return home at the end of it.
Let’s say you’re working in South Africa, for a multi-national company, which then sends you to their office in Dubai for 6-12 months, for you to gain some offshore experience.
Currently, in this type of scenario, you’d fall directly into the s10(1)(o)(ii)exemption. This means that you’d be filing your tax return in South Africa, but claiming your foreign employment incomeas an exemption due to you being out of the country for at least 183 days (60 being consecutive), within a 12-month period. So, you’d benefit from the favourable tax regime in the UAE, while your income is exempted from tax in South Africa too – the end result would be the chance to escape the tax net altogether. It’s these taxpayers that will be dramatically affected by the new law.
Following on from our example, from 1 March 2020, a taxpayer who pays 0% tax in Dubai and who has historically claimed the s10(1)(o)(ii) foreign income exemption on their South African tax return, will be required to pay tax on their foreign income exceeding R1m in South Africa based on the normal tax tables for individuals.
2. A South African who’s been working overseas for a number of years, but has not **“financially emigrated” and plans to return home at some point after their travels.
An example of this would be, if you left South Africa shortly after your studies to work in London for a few years. You may have ended up working there for multiple years, but you do have plans to return home “at some stage”. In this scenario, it’s likely that you’d pay tax in the UK and don’t consider yourself a tax resident* of South Africa and therefore don’t file tax returns here.
However, if you leave South Africa without “financially emigrating,” you may be viewed by SARS as a South African resident living temporarily abroad and you’ll be subject to the same tax laws and financial regulations as people living in South Africa.
Before the law amendment, these types of taxpayers would’ve also fallen within the s10(1)(o)(ii) exemption. Technically, they should’ve been filing tax returns in SA and declaring their foreign remuneration which would then have been exempted under s10(1)(o)(ii). Even if they did not file tax returns and were therefore not compliant with SARS, their income tax liability would’ve been nil anyway due to the foreign income exemption.
It’s these types of taxpayers that will also be affected by the new law. Following on from our example, a taxpayer who pays 20% tax in the UK, will have to declare all of their UK income in South Africa and will be taxed on their foreign earnings exceeding R1m. Many of these taxpayers will be earning well above the Rand equivalent of R1,5m, and therefore will have to pay tax on up to 45% of their UK earnings in South Africa!
They would be able to deduct the foreign tax they paid so as not to be taxed on the same income twice, however will no longer reap the benefits of the lower UK tax rate.
*It would always be advisable to check with a tax professional if you may be considered to have broken your South African tax residency at any point.
**Financial emigration involves a very specific set of procedures which results in the taxpayer changing their status to that of a non-South African tax resident. These include obtaining a tax clearance and recording their emigration with the South African Reserve Bank, as well as with SARS.
3. A South African who has” financially emigrated”
If you work overseas and have recorded your emigration with the South African Reserve Bank and SARS, you’ll no longer be regarded as a tax resident in SA. You’ll be only subject to the tax laws in the country in which you work, and not South Africa as well unless you earn South African income. Therefore, you’ll only need to file a SA tax return if you earn South African source income e.g. you own and rent a property in SA.
You can breathe a sigh of relief and pat yourself on the back for formalising your financial affairs in South Africa – this new law will not apply to you!
Double taxation relief
If the taxpayer works for a South African employer (example 1 above), there is a chance that tax will be withheld both in South Africa as well as the host country where the expat has been assigned. Fortunately, it was proposed in the recent budget that South African employers will be able to reduce their monthly tax withholding by the amount of any foreign employee’s tax withholding that applies to that income. Treasury have recognised that this will be a tricky one to administer and have advised that workshops will be held prior to implementation to consult with taxpayers on their concerns.
One final point to address is that it is not clear how a Double Tax Agreement, which may exist between South Africa and the country in which the taxpayer is working, would impact this law. I guess we’ll have to wait for further updates and amendments during the course of this year.
As always, we will update you with any changes and the latest word from Treasury and SARS!