Foreign Employment Income Exemption - What is it really?




This is the exemption is for employees that receives foreign employment income for services rendered outside of South Africa, provided that all the requirements are met.

Previously if SA expatriates, satisfied the requirements of the exemption, it was possible for their remuneration to be wholly exempt from tax in South Africa.

From 1 March 2020 the exemption will be capped at R1,25 million per annum. Therefore, any remuneration received above R1,25 million will be subjected to normal tax in South Africa, irrespective of whether tax is paid in another country. Thankfully though, you will always be able to deduct the foreign tax you already paid from the South African tax you owe. More on this later.

MOTIVE FOR THE AMENDMENT

This exemption was introduced in 2000 to prevent double taxation between South Africa and the expatriate’s host country but unfortunately, this created the opportunity for ‘double non-taxation’ where the host country imposes little or no tax, the exemption is not used for the purpose at which it is directed. Hence, it was decided to impose a threshold of R1,25 million from 1 March 2020 

REQUIREMENTS TO QUALIFY FOR THIS EXEMPTION 

 You as taxpayer must –

  • be a tax resident of South Africa;
  • earn certain types of remuneration;
  • in respect of services rendered by way of employment;
  • outside South Africa;
  • during specified qualifying periods; &
  • not be subject to an exclusion

A. Are you a tax resident?

The exemption only applies to you if you are a South African tax resident and you are an employee that provides a service/s outside of South Africa and is subject to your worldly income.

The exemption does not apply to you if you are a non-resident for tax purposes as your foreign income in relation to foreign services provided outside South Africa will not be subjected to tax in South Africa. In easy terms if you are a foreign tax resident, only your South African income is taxed in South Africa.

Financial emigration does not necessarily mean that your tax residence status has changed. This is merely only one factor that may be considered to determine whether or not an individual broke his or her tax residence. The deciding factor remains whether or not you break your ordinary residence status. Financial emigration through the South African Reserve Bank (SARB) is to be phased out from 1 March 2021.

You can be classified as a South African tax resident by your ordinarily residence or by the physical presence test.

If you are unsure if you are a South African tax resident or not, please refer to our decision tree here.

B. What is included in remuneration for this exemption?

The exemption requires that the taxpayer must earn a specific type of remuneration by a specified means. In this context the definition of ‘remuneration’ is more limited compared to the definition in the Fourth Schedule to the Act.

The following amounts fall within the definition of remuneration for this exemption:

  • Accommodation
  • Allowances (including travel allowances, advances and reimbursements)
  • Amounts derived from broad-based employee share plans
  • Amounts received in respect of aa share vesting
  • Bonus
  • Commission
  • Emolument
  • Fees
  • Gratuity
  • Leave pay
  • Overtime pay
  • Salary
  • Special medical aid cover
  • Taxable benefits
  • Transport services
  • Wages

It’s crucial to realise that these benefits and allowances are fully taxable, even if they are provided due to necessity, and their cash equivalent values count towards the exemption threshold.

This has been the thorn in the employees and employers’ side as it is seen as unfair to tax expatriates on benefits in terms of domestic legislation, where the benefits are given due to circumstances in the host country. This may consume a large chunk of the given exemption threshold, and more expatriates may be affected by the amendment than anticipated.

C. Do you have an employment relationship?

This exemption will only be allowed if you there is an employment relationship that exists.

The services that are rendered for or on behalf of the employer must be rendered under an employment contract.

You will still qualify for this exemption no matter if the employer is a resident or a non-resident.

Unfortunately, you will not qualify for the exemption if you are a independent contractor or if you are self-employed.

D. What are the qualifying periods?

You must be outside of South Africa for –

  • A period/s exceeding 183 full days in aggregate; &
  • A continuous period exceeding 60 full days during that 12-month period.

Please also note that if you rendered services inside and outside of south Africa, the income received should be apportioned and only the income received in respect of work days outside South Africa during which services were rendered, will be exempt.

E. Do you fall under the categories of individuals that are excluded from the exemption?

Unfortunately, you will not qualify for this exemption if you are -

  • A public office holder appointed or deemed to be appointed under an Act of Parliament
  • An employee who are employed in the national, provincial or local sphere of government, certain constitutional institutions, national and provincial public entities and municipal entities
  • An independent contractor and who are self-employed because you are not in an employment relationship

DOUBLE TAXATION & THE RELIEF THEREOF

You may have a double tax situation on your hands if your remuneration earned are over and above the exemption thresholds. This means you are taxed in both countries.

This will normally happen where there is no tax treaty or where a tax treaty does not provide a sole taxing right to one country. A tax treaty is the agreement between two countries to resolve double taxation issues.

At least you have Section 6quat on your side for some double tax relief. Section 6quat is the mechanism to claim relief from double tax where the amount received for services rendered outside of South Africa is subject to tax in South Africa and in the foreign country. You may claim this credit on assessment when you, as an individual, submit your income tax return that is if you met the specified requirements. In layman’s terms, the foreign tax paid on the portion of remuneration included in income will be set-off against the South African normal tax paid so that no double tax is ultimately suffered.

Your employer may at his or her discretion apply for a directive from SARS to vary the basis on which employees’ tax is withheld monthly in the Republic. The potential foreign tax credit is taken into account to determine the employees’ tax that has to be withheld for payroll purposes. The tax directive should not be confused with Section 6quat. The employee is still required to submit an income tax return in which the actual foreign tax credit under section 6quat should be claimed. 

Let’s give you an example to show you what a difference the tax directive can make:

Tommy works for his employer overseas and has an employment contract in place. He is a South African Tax resident, receives a foreign salary and he fulfils the requirement for the qualifying period. He received a total foreign salary of R2,000,000 on which they deducted R200,000 of foreign taxes and a South African salary of R200,000 for the 2021 tax year. We will now calculate the total tax due on normal tax brackets and the total tax payable on tax directive that was applied for at a rate of 44%

 

 

NORMAL TAX RATES

TAX DIRECTIVE

Total Foreign Salary received

 

R2,000,000

R2,000,000

Less: Exempt portion

 

(R1,250,000)

(R1,250,000)

Total Taxable Portion of Foreign Salary

(R3,000,000 – R1,250,000)

R750,000

R750,000

Plus: South African Salary

 

R200,000

R200,000

TOTAL TAXABLE INCOME

 

R950,000

R950,000

 

 

 

 

TOTAL TAX CALCULATED ON TAXABLE INCOME

 

R287,313

R287,313

Less: Total employees’ tax withheld in SA on the South African Salary

Using our Income Tax Calculator

R200,000 x 44%

(R21,042)

 

(R88,000)

Less: Foreign Tax credit**

 

(R200,000)

(R200,000)

Total Tax payable/(refundable) on assessment

 

R66,271

(R688)

In this example, the taxpayer will need to pay an additional R66,271 tax that was short on the taxable portion of the foreign income. If he applied for a tax directive his employer would have deducted more employees tax each month as per the percentage applied for and then he would have received a small refund back on assessment.

**Please note that the foreign tax credit can be limited, more news on this later.

Image by StockSnap from Pixabay

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