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 recent proposal, 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 didn’t file tax returns and were therefore not 100% tax compliant, it doesn’t really matter much since 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 proposal. Following on from our example, a taxpayer who pays 20% tax in the UK and falls into the 36% tax bracket in SA on their rand equivalent earnings, may be required to pay an additional 16% tax (i.e. 36% - 20%) on their foreign income in South Africa, should the proposal take effect.
*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 subject to the tax laws in the country in which you work. 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. The s10(1)(o)(ii) exemption and proposed changes will thus not apply to you.
So, you might be wondering what should taxpayers think about when evaluating what to do about the proposed changes? We’ve highlighted four important points to consider:
1. The law, if amended, will only be effective from tax years beginning 1 March 2019.
2. Even if the law does affect you, you may not be liable for additional tax if you work in a higher tax
3. Wait for TaxTim to provide more information as we learn more about the proposed changes.
4. The effects of any Double Tax Agreement may still override this proposal.