Explained: Tax relief vs tax refunds in South Africa

As a South African living and working abroad, it’s a good idea to know exactly what your tax status is so that you can be clear on your tax obligations and rights back home. This is because changes made to tax law through the Taxation Law Amendment Act in 2020 mean that tax residents are now liable to pay tax back in South Africa on foreign income earned abroad. The first R1.25 million earned abroad is eligible for tax exemption which must be sought from the South African Revenue Service in the form of a tax credit. However, as a non-tax resident where you have paid tax on, pension or annuity income received from South Africa, for example,  you could be due a tax refund.

How does it all work? What’s the difference between tax relief and a tax refund, and what impact does a Double Tax Agreement have on tax payable in South Africa? Let’s take a quick look.

 

Tax refund vs tax relief in South Africa

A tax refund happens when you have paid more tax than you should have. Tax relief means that you can ask the South African Revenue Service to overlook certain income when calculating your tax liability for that tax period.

 

When could you be due a tax refund as a South African tax resident abroad?

You might qualify for a refund if you have been taxed on lump-sum payments from retirement funds.

• If you have retired and or cashed in your South African retirement fund in the last three years a tax refund may be due to you, regardless of whether it was a retirement annuity, pension or provident fund.

 

You might be eligible for a tax refund in South Africa, but you must have:

• Previously contributed to a retirement fund
• Been already living, working and registered for tax abroad before retiring/withdrawing from your fund.
• Cashed in/retired from your fund after 2017.

 

Because you are already living abroad, the manner in which lump-sum payments made to you from different retirement funds will be taxed must be determined by the Double Taxation Agreement, if there is one in play between South Africa and the country in which you are earning a foreign income.

• This Double Taxation Agreement assigns taxing rights either to both countries, or exclusively to the country of tax residence (which is South Africa).
• Whether or not a lump sum payment qualifies for a tax refund from South Africa will be determined by the nature and source of the lump sum. If a lump sum is eligible for a refund, it is necessary to lodge an objection with SARS in order to claim this tax refund. Objections can be lodged up to five years after the lump sum was received.

 

You might be due a tax refund in South Africa you’ve paid withholding tax on interest

• This tax is payable by non-resident individuals on interest that they paid from a source within South Africa, which usually has a final withholding tax rate of 15%.
• It is possible, however, to apply for a reduced withholding tax rate if you meet certain requirements, which means that SARS then owes you the difference between what you paid and the reduced rate charge.
• Simply meeting the requirements for a reduced rate does not automatically trigger a refund, it is something that must be manually sought from SARS.
• To get the difference back, it is necessary to submit a “Withholding Tax on Interest Declaration” for the payer of the interest, which document can be sought from SARS on application.
• This document declares that the withholding tax was deducted from an individual at a higher rate than was necessary, and that the payer should be eligible to request a tax refund for overpaid withholding tax.
• As long as this declaration is submitted to SARS within three years of paying the interest, it is likely that the difference will be refunded to you, the non-resident individual.

 

You might be due a tax refund if you’ve paid tax on pension and annuity income received from South Africa

• As the recipient of pension/annuity income from South Africa, you will be charged income tax.
• If an individual has paid tax on their South African annuity and pension income, they are able to claim a refund for the tax paid by submitting the RST02 application.
• Non-resident individuals may qualify for a tax refund in South Africa, where they submit an RST01 application to SARS, which is an application made by a tax non-resident seeking relief for tax on pension and annuities that are made in terms of a Double Taxation Agreement.
• You will need to apply anew to use this relief every year.

 

Tax relief in South Africa: Applying a Double Tax Agreement

It’s tempting to think that just because there’s a Double Tax Agreement in play, that income earned in the host country is not taxable in South Africa because the host country has exclusive taxing rights. This is incorrect. Most DTAs actually give exclusive taxing rights to the country of tax residence unless the employment is exercised in a host country, in which case (subject to certain exclusions) both countries have a right to tax the income in question. Long story short? As a South African tax resident, your income remains subject to tax in South Africa. Where your host country has dual taxing rights, paying tax in your host country can be used to claim relief in the form of tax credit in South Africa.

 

How does tax relief work in terms of a Double Tax Agreement?

If applied correctly, the residency article of the DTA can be used to override the provisions of the Income Tax Act with the outcome that a person will be regarded as a tax non-resident for that tax period because of the DTA that applies, regardless of whether they meet the residency tests contained in South African tax law. However, as with all tax relief, it does not apply automatically. DTA relief must be sought from SARS, and it’s something that they want you to prove while you’re at it. Just as a taxpayer would use the foreign income threshold exemption provided section 10(1)(o)(ii) of the Income Tax Act, as a tax resident under South African law, you are required to file your return and to claim the relevant DTA relief.

 

FinGlobal: Tax specialists for South Africans abroad

Unsure of your tax residency status? When it comes to taxes, it’s always best to err on the side of caution. Failure to do so could have severe consequences, including tax penalties and criminal prosecution. FinGlobal can help you ascertain your tax residency status and assist you with all expat tax compliance matters, tax clearance queries, and tax refunds from SARS. We have all the necessary expertise in-house to smooth out your tax affairs and ensure that you’re always on the right side of the tax law.

Ready to start your obligation-free, confidential SARS tax residency assessment? Leave us your contact details and we’ll be in touch!