Many South Africans receive some sort of foreign income, whether it’s from dividends, employment, rental income, interest or royalties. You may be wondering if that income you receive from a foreign country is taxable in South Africa and whether you should declare it in your South African tax return. The short answer is yes: foreign income is taxable in South Africa.
The South African tax system states that if you’re a South African resident (for tax purposes), you will be taxed on all local and foreign income you receive, regardless of where it is paid and where the source of the income is. This is called the World Wide Basis of taxation. So, if you have a South African passport and regard South Africa as your regular place of residence, you will more than likely have to pay income tax in South Africa. Fortunately, there are a few foreign tax exemptions you may be eligible for.
To understand the tax implications of foreign income better, we’ll break it down into the types of income:
- Foreign employment income
- Foreign dividends & interest income
- Foreign rental income
- Foreign trade income
- Foreign royalties
If you think earning an income from a global source isn’t taxable on home soil, we’re afraid we have some bad news. Whether you’re earning Dollars, Euros or Yen, as a South African, it’s more than likely you’ll have to pay tax on this income. This is due to the world-wide basis of tax we mentioned earlier.
There is, however, some good news!
Section 10 of the Income Tax Act offers a list of conditions where income earned (or at least a portion of it) for services rendered outside of South African borders will be exempt from income tax. This exemption will be capped at R 1.25 million per annum from 1 March 2020.
A portion of your foreign income may not be subject to South African tax if you:
- Have a formal employment contract (with a resident or non-resident employer),
- Are a South African tax resident,
- Earn a certain type of remuneration
- Spend at least *183 days (roughly 26 weeks, or about 6 months) of a consecutive 12-month period outside of SA rendering services to your foreign employer, and
- At least 60 of these days are continuous or unbroken.
Still not sure? Try our decision tree to see if your foreign income is exempt from tax.* For the 2020 and 2021 years of assessment, this requirement has been reduced from 183 days to 117 days.
We find that the 183-day / 60 continuous day test is the most confusing condition to understand and calculate, so let’s find out more.
Firstly, the 183 days includes all calendar days, not only work days. Weekends, public holidays, annual leave days, sick leave days and rest periods spent outside of SA (provided you’re employed at the time) are all included when figuring out if you meet the 183-day condition.
Secondly, the consecutive 12-month period isn’t necessarily a calendar, financial or tax year. It’s any period of 12 successive months.
Let’s pretend you have a contract that starts on 1 April 2019 and is valid for 18 months, ending 30 September 2020. To see whether you meet the 183 day / 60 continuous day condition, you’ll need to:
- Mark the first date of your contract and count forward 12 months, e.g. 1 April 2019 to 31 March 2020.
- Now determine whether you spent at least 183 days outside of SA during this period.
- Then see if at least 60 of these days were continuous, i.e. in a row, with no break.
If you don’t meet the conditions using the above method, then repeat the steps but use the end date of your contract and work backwards 12 months, e.g. 30 September 2020 – 1 October 2019.
If, using either method, you meet the 183 day / 60 continuous day criteria, then you’re likely to receive at least a portion of your remuneration as non-taxable.
Let’s now take a look at how SARS works out the apportionment of your income to determine the amount deemed to be exempt from tax.
The amount of your remuneration for the year that will be exempt from income tax comes down to how much of your income was earned while you were outside of SA’s borders.
Here’s the formula that is used:
(Working days outside of SA for the specific period / by the total work days for the period) x the remuneration received for the period.
For the above formula, it’s important to note that work days only refer to days where services are rendered, and therefore exclude weekends, public holidays or leave taken. Also, the period refers to the full period during a year of assessment during which a taxpayer is required to render services outside of SA.
Here’s a calculation to explain:
Sandiswa is employed by a South African subsidiary of a multi-national organisation and was asked to travel to Geneva to help set-up a new office there. She left SA on 1 May 2020, started work on 2 May 2020 and was contracted to work in Switzerland up until 19 December 2020. The subsidiary company in Switzerland paid Sandiswa R 650 000 in total for this time period. On 20 December 2020, she left Switzerland to come home to South Africa.
During her contract period in Switzerland, Sandiswa returned to South Africa three times to help her local team with a different project. These dates, which included travel time, were:
- 22 June 2020 to 6 July 2020
- 30 August 2020 to 7 September 2020
- 11 November 2020 to 20 November 2020
She also took three days’ annual leave from 17 to 20 November during her third trip to SA.
First up, we need to test the 183-day / 60-day rule. We do this by plotting the number of calendar days that Sandiswa worked in Switzerland by using a basic table:
2 May 2020 - 21 Jun 2020
7 Jul 2020 - 29 Aug 2020
8 Sep 2020 - 10 Nov 2020
21 Nov 2020 - 19 Dec 2020
We can see from the above that she spent a total of 198 days outside of the country. From 8 September to 10 November 2020, she spent 64 consecutive days in Switzerland, therefore she satisfied the 183/60-day test and because of this, a portion of her R 650 000 income will qualify for tax exemption.
Now let’s look at the apportionment calculation.
We need to know the number of work days that Sandiswa spent outside of SA, compared to the total number of work days in the period.
Total work days during period
Actual work days outside of SA
Actual work days in SA
2 May 2020 - 21 Jun 2020
22 Jun 2020 - 6 Jul 2020
7 Jul 2020 - 29 Aug 2020
30 Aug 2020 - 7 Sep 2020
8 Sep 2020 - 10 Nov 2020
11 Nov 2020 - 20 Nov 2020
21 Nov 2020 - 19 Dec 2020
*The three days annual leave must be deducted from actual work days for the calculation.
The portion of Sandiswa’s remuneration that is exempt from normal tax in South Africa is calculated like this:
Work days outside South Africa for the period = 136
Total work days for the period = 158 (161 days less 3 leave days)
Remuneration for period= R 650 000
(Work days outside SA / total work days) x Remuneration
= (136/158) x R 650 000
= R 559 494
This is the portion of Sandiswa’s remuneration that’s considered non-taxable, as it’s directly related to services rendered outside of SA. The remaining R 90 506 will be subject to SA income tax, as she was working in SA for those days.
In some cases, employment contracts specify and enforce rest days in line with their Health and Safety Regulations. For example, if you’re working as an airline pilot outside of SA, it might be an employment condition that you work for a specific number of days or weeks before being forced to take a certain number of days or weeks as rest days, for safety reasons. During this rest period you’re still employed, but you’re not physically rendering your services.
In cases like this, SARS believes that during a qualifying period (i.e. the 183/60-day test is met), all remuneration that can be attributed to services rendered offshore will qualify for exemption and no apportionment must be done.
A few employers may be brave enough to apply this section of the Act to the taxpayer’s situation and not deduct employee’s tax, however most will take the safer route of withholding tax, leaving the responsibility on the employee to do their annual tax return and get a refund on the tax paid.
If you’re in a position where you’re working for a foreign company outside of South Africa for extended periods of time, you should familiarise yourself with the tax guidelines and implications – especially those related to the qualifying criteria and apportionment calculation for tax exemption. Jetting back and forth may impact your ultimate tax liability, so think carefully before you book those plane tickets home!
SUPPORTING DOCUMENTS REQUIRED FOR SARS
In all instances of foreign employment and related travel, it’s worth keeping the following documents handy, as you can be pretty sure that SARS will request them:
- Spreadsheet showing number of days in and out of SA
- Copy of your passport showing days in and out of SA
- Letter from your employer stating you’re allowed to work overseas (and for what periods), plus what amount was earned during that period
- Foreign/expat assignment employment contract
- IRP5 showing foreign employment income earned (e.g source code 3651, 3653, 3655, etc.
Note that you need an IRP5 reflecting foreign income to the relevant foreign source codes in order for SARS to grant the s10(1)(o)ii exemption. If your employer has used the local codes, you need to ask them to re-issue you the IRP5 to reflect the foreign income source codes.
National Treasury announced that there would be changes to the Foreign Employment income Exemption in 2017. These changes were made in order to target those South Africans working out of the country on expat contracts, who may not have formally emigrated and were planning to return to live in SA at a later stage. These proposed amendments would have meant that South Africans working overseas in low or zero tax jurisdictions (where they pay little or no tax on employment), would now be subject to tax in South Africa.
This announcement shocked the South African expat community, because many of them were escaping paying tax in South Africa by claiming the s10(1)(o)(ii) exemption, and therefore benefitting from more favourable tax regimes in other countries.
Treasury has since cleared up their stance on this 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 income over and above R 1.25 million.
At TaxTim we’re all about explaining these changes to people simply, so that you can understand if it affects you or not. With this in mind, we’ve identified three examples of taxpayers that this new law would 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 SA for a multi-national company, who then sends you to their office in Bermuda for 6-12 months, so you can gain some valuable offshore experience.
Currently, you’d fall under the s10(1)(o)(ii)exemption. This means that you’d be filing your tax return in South Africa, but claiming your foreign employment income as exempt because you’d be out of the country for at least 183 days (60 being consecutive), within a 12-month period. So, you’d benefit from the more favourable tax regime in Bermuda, while your income is exempt from tax in South Africa too – so the net result would be extremely favourable for your income (and you!). It’s these taxpayers that will be dramatically affected by the new law.
Following on from this example, from 1 March 2020, a taxpayer who pays 0% tax in Bermuda and who has historically claimed the s10(1)(o)(ii) foreign income exemption on their South African tax return, will now be required to pay tax on their foreign income exceeding R 1.25 million 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 and plans to return home once they’ve finished travelling.
Picture someone who’s left South Africa shortly after their studies to work in London for a few years. They may have ended up working there for five years already, but they do have plans to return home at some stage in the future. In this scenario, they probably pay tax in the UK and don’t consider themselves a tax resident* of South Africa, so they don’t file tax returns here.
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 didn’t file tax returns and were therefore not compliant with SARS, their income tax liability would’ve been zero anyway, due to the foreign income exemption.
It’s these types of taxpayers that will also be affected by the new law. For example, a taxpayer who pays 20% tax in the UK, will have to declare all of their UK income in South Africa and will now be taxed on foreign earnings exceeding R 1.25 million. Many of these taxpayers will be earning much more than the Rand equivalent of R 1.5 million, and therefore will have to pay tax on up to 45% of their UK earnings in South Africa!
They will be able to deduct the foreign tax they’ve paid, so they’re not taxed on the same income twice - however they will no longer benefit from the lower UK tax rate.
*It’s best to check with a tax professional if you think you may have broken your South African tax residency.
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, this does not necessarily mean that your tax residence has changed. This is merely only one factor that may be considered to determine whether or not you have broke tax residence. The deciding factor remains whether or not you break your ordinary residence status.
Please note financial emigration through the South African Reserve Bank (SARB) is to be phased out from 1 March 2021.
Double taxation relief
If you’re a taxpayer who works for a South African company (example 1 above), tax may be withheld in both South Africa and the host country where you’re working. Fortunately, 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 or by means of a Fixed Percentage Tax Directive.
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.
South African residents that earn foreign dividends generally have to pay tax on those foreign dividends and declare them when submitting their South African tax return.
The tax paid on the foreign dividends depends on the amount and type of shares held in the foreign company.
In most cases, where the taxpayer holds less than 10% of the equity shares and voting rights in the foreign company, then the foreign dividend received will be taxed. The full amount of the dividend must be shown in the tax return, however SARS will allow a tax exemption which equates to 25/45 of the Rand value of the foreign dividend. If the taxpayer has paid foreign tax on the dividend, this must also be declared, and SARS will reduce the local tax by the foreign tax paid.
Where the taxpayer holds at least 10% of the equity shares and voting rights in the foreign company, then 100% of the foreign dividend will be exempt in the taxpayer’s hands.
Here’s an example:
Jessica received a foreign dividend of R 10 000 ($ 662) on shares listed on the New York Stock Exchange. She is on a marginal tax rate of 45% and she owns less than 10% of the equity shares in the company. The tax she will pay on the foreign dividend is therefore calculated like this:
Gross income R 10 000
Foreign dividend exemption (25/45 x R10 000) (R 5 556)
Dividend included in taxable income R 4 444
Tax at 45% R 2 000
You need to declare foreign dividends (source code 4216) in the Investment Income section of your tax return, together with the foreign tax credit (source code 4112).
If you earn foreign interest, you need to report the Rand equivalent amount to SARS. Unlike local interest, there is no exempt portion, however you would be able to deduct any foreign tax you pay.
You need to declare foreign interest (source code 4218) in the Investment Income section of your tax return, together with the foreign tax credit (source code 4113).
If you own property overseas and are receiving an income by renting your property out abroad, then this classifies as “foreign rental income” which is taxable for all South African residents. Any expenses that you incur relating to earning the rental income (bond interest, rates and taxes, insurance and repairs for example), should be claimed as a deduction, so you can reduce your tax liability.
Often the country where your property is located will have deducted or withheld taxes from your rental income. You would be able to deduct these taxes as a foreign tax credit, so that you never pay tax twice. You would do this by entering the foreign tax paid in the relevant field within the Foreign Income section of your tax return.
Remember to always check the rules of the country where the property is held to ensure you are tax compliant there as well, as you may need to submit a tax return there too.
If you earn foreign business or freelance income while based in South Africa, you need to declare the Rand value of the profit in your tax return. The profit will be taxed just like a local business i.e you can deduct all of your trading related expenses from your business income. Unlike a local business, there is not a separate section to declare all the revenue and expense items separately. You can simply work out the foreign profit and declare it as one amount in the foreign income section of the ITR12.
As a South African, if you receive royalty income from the use or utilisation of trademarks, patents, mineral rights, artistic or literary works from outside of South Africa, you’ll be liable to pay foreign royalty income tax when submitting your South African tax return.
I work for a USA company and earn $ 65 000 per year. The company does not have a local presence and is therefore not registered in South Africa - what is the tax process?
If the American company is not registered as an employer in South Africa, and therefore doesn’t deduct PAYE from your salary, you’ll need to register as a provisional taxpayer and pay provisional tax twice per year on your earnings. Please read our guide on Provisional Tax for further clarification on how you will declare and pay tax to SARS.
I have an employment contract outside of SA and my employer does not deduct PAYE. Do I have to be outside of SA for 183 days, of which 60 must be consecutive in a tax year, or just in a 12 month period (if contract is from 15 April 2020 - 15 April 2021)?
It needs to be in a 12-month period - therefore from 15 April 2020 to 14 April 2021, and you’d need to spend 183 days outside SA during this period, with 60 days of these continuous. However, bear in mind that only income earned while you’re rendering services outside of SA will be exempt. If you return to SA and work locally for a while during this 12-month period, then your exempt portion will have to be pro-rated and reduced (there is a formula from SARS to apply).
My wife and I are Irish and UK citizens respectively, currently living in the UK, and are interested in the feasibility of retiring to South Africa. My particular interest is understanding how my UK pension income would be taxed in SA.
Foreign pensions are not subject to tax in South Africa, but they would still need to be declared. You would only pay tax on any income actually earned in South Africa, or if you become a tax resident then you’d be taxed on any other income earned worldwide, less any taxes already paid in that other country. Your foreign pension would still remain exempt, however.