If you’re a South African working abroad, you’re probably concerned about how the incoming Income Tax Act amendments are going to affect you, if they affect you at all. Ahead of the 1 March 2020 commencement date, we’ve looked beyond the news headlines to see what the expat tax 2020 issues are, what expats are worried about and put together a breakdown of all the impending rule changes, while laying out the facts about South Africa’s new expat tax and what to expect.

 

The Expat Tax South Africa: 2020 brings changes to foreign income tax exemption

After 1 March 2020, according to section 10(1)(o)(ii) of the Income Tax Act, South African residents working abroad will only be exempt from paying tax on the first R1.25 million they earn abroad. After this first R1.25 million, they will be taxed according to their personal marginal rate.

What does this mean? It means that the legislative loophole that previously existed, in terms of which it was possible for South African residents working abroad to claim tax exemption on foreign earnings, has been closed. The R1.25 million threshold provides relief to some – but if you think about the fact that remuneration includes things like travel and housing allowances,  as well as bonuses and overtime pay – these all add up and can quickly exceed that R1.25 million threshold, after which residents can expect to be taxed by the South African Revenue Service (aka SARS).

 

Who can be taxed on their foreign employment income? Who is a tax resident?

You will be considered a resident for tax purposes in South Africa by way of ordinary residence, or by way of physical presence. This is because we have a residence-based tax system that allows for residents to be taxed on their worldwide income, regardless of where that income was earned. If you are a non-resident, SARS cannot tax you on your worldwide income, only your income earned in South Africa.

The ordinarily resident test is applied on a case-by-case basis taking into account a variety of factors. If this test is not satisfied, then the physical presence test is applied in order to determine tax residency status. However, even if both (or one) of these tests are satisfied, an individual may be excluded from being regarded as a South African resident tax purposes if that person is a resident of another country subject to a tax treaty.

(Read more about the ordinarily resident and physical presence tests in action.)

 

Can I financially emigrate to avoid having to pay expat tax in South Africa?

Unfortunately, financial emigration (also known as formal emigration) is not the quick fix that some people were hoping for. It’s not going to make your tax obligations disappear, and SARS is still going to be interested in you. Financial emigration is simply an exchange control process, and merely one of the factors that can be taken into consideration when determining whether or not a resident has broken tax residency.

Your tax residence is not automatically interrupted when you financially emigrate – the deciding factor is whether you’ve broken your ordinary residence, or you’re no longer physically present in the Republic.

 

How do I break or change my tax residence?

This is a factual enquiry, more than an action or a procedure. Deciding whether or not a person has broken tax residence depends on whether that person stops being ordinarily resident in South Africa. By virtue of the physical presence test, you can cease to be a tax resident when you are physically outside of the Republic for a continuous period of more than 330 full days.

[Read: How to become a non-resident for tax purposes]

However, you’re going to want to be careful about your decision to become a non-resident for tax purposes. This is because a disposal (for Capital Gains Tax purposes) of all your worldwide assets is deemed to have taken place at the same time you break your tax residence. Effectively this means that SARS presumes that you disposed of all your worldwide assets (excluding immovable property in SA) at the relevant market rate; which triggers a Capital Gains Tax liability to SARS.

 

The Expat Tax Exemption in South Africa before 1 March 2020

SARS has said that exemption under section 10(1)(o)(ii) of the Income Tax Act applies to a South African tax resident who is an employee and renders services outside South Africa on behalf of an employer (South African or foreign) for longer than 183 full days in any 12-month period as well as a continuous period exceeding 60 full days outside South Africa in the same period of 12-months. The exemption does not apply to non-residents.

 

Expat Tax 2020: Before and After 1 March 2020

If you’re a South African living and working abroad, and you’re confused about the impact of the changes to the Income Tax Act and how the ‘expat tax’ will affect you after 1 March 2020, take a look:

CONSIDERATION	BEFORE 28 FEB 2020	AFTER 1 MARCH 2020
Who is affected?	South African tax resident.	South African tax resident.
What counts as “remuneration”?	Salary, leave pay, wages, overtime pay, bonus, gratuity, commission, fee, emolument or allowance, as well as any share vestings.	Salary, leave pay, wages, overtime pay, bonus, gratuity, commission, fee, emolument or allowance, as well as any share vestings.
Who counts as an “employee”?	Any employee (not an independent contractor, freelancer or self-employed person.)	Any employee (not an independent contractor, freelancer or self-employed person.)
Who counts as an “employer”?	South African or foreign employers.	South Africans or foreign employers.
When is a “qualifying period”?	Any 12-month period.	Any 12-month period.
What does it mean to be “outside South Africa”	Beyond the territorial waters (12nm) of SA for any person performing employment services, including any officer/crew member employed on a ship who is engaged in prospecting, exploration, mining or mineral production, as long as they are not employed for ship navigation or for the exploration or exploitation of natural resources; or any officer/crew member employed on a South African ship mainly engaged in fishing, where they are not employed for the exploitation of natural resources.	Beyond the territorial waters (12nm) for any person performing employment services, including any officer/crew member employed on a ship who is engaged in prospecting, exploration, mining or mineral production, as long as they are not employed for ship navigation or for the exploration or exploitation of natural resources; or any officer/crew member employed on a South African ship mainly engaged in fishing, where they are not employed for the exploitation of natural resources.
How much time is required outside of South Africa?	It must be a period that is longer than 183 days in total during any period of 12 months, which must include a period of longer than 60 consecutive full days.	It must be a period that is longer than 183 days in total during any period of 12 months, which must include a period of longer than 60 consecutive full days.
Which income is exempt from tax?	All foreign employment income earned working outside the Republic.	Only the first R1 250 000 earned while working outside the Republic.
Will financial emigration absolve you from expat tax 2020?	No. Financial emigration is an exchange control process that changes your status from “resident” to “non-resident” for the purposes of creating a free-flow of capital out of South Africa to your new home. It does not affect your tax residency status or citizenship.	No. Financial emigration is an exchange control process that changes your status from “resident” to “non-resident” for the purposes of creating a free-flow of capital out of South Africa to your new home. It does not affect your tax residency status or citizenship.
How do you stop the section from applying to you?	Tax emigration.	Tax emigration.

[Table based on SARS Foreign Employment Income Exception]

 

Warning: you could be double taxed

Double taxation is possible where a person earns employment income in excess of R1.25 million; and a sole taxing right is not assigned to one country in terms of a double tax agreement.  In this case, both countries have a tax claim to the income if the employee renders services in a foreign country for more than 183 days. The source country has first claim on the income, and the country of residence (South Africa) must then provide double tax relief by means of a foreign tax credit to the extent that the tax was paid in both countries, subject to certain limitations.

Top tip: You can find a comprehensive, up-to-date list of all the countries that hold Double Tax Agreements with South Africa on the SARS website.

 

FinGlobal: Your South African Expat Tax 2020 Specialists

Still confused about expat tax and tax resident status and where financial emigration fits into the picture for you? FinGlobal can help. With a specialised team of tax experts, certified international financial planners and financial emigration professionals we’ve already worked with thousands of clients across the globe with various aspects of their cross-border financial portfolios, and we’re ready to offer the same seamless, secure convenient service to you. 

So take a look at our transparent fee structures, meet the team, take a look at our credentials and see what our clients have to say about working with us.

If you’d like to know more about your options around expat tax 2020, let’s talk. Leave us your details and one of our tax experts will be in touch with you.