Tax legislation in South Africa regarding expats tends to be a little confusing. This confusion has resulted in expats seeking clarity on this topic by raising questions about what the tax legislation actually means. For example, some expats might want to examine the section on the exemption of SA tax if the Saffa is a resident in the UK. Most automatically assume that the tax law intends to tax expats in South Africa on their foreign earnings, with an exemption of R1.25 million on annual foreign gains. If you are looking for clarity on this subject, here’s the scoop.
Are you a South African tax resident?
Firstly when it comes to tax laws, you need to understand if you are a resident. This is because the South African tax legislation rules apply to those who qualify as South African tax residents. In order to understand if you qualify as a tax resident, you need to satisfy a ‘residency test’ or a ‘physical presence test.’ Thankfully you don’t need to swot for these tests, but you need to meet specific criteria.
Also known as the ‘Ordinarily resident test’ applies to South Africans whose usual permanent home is in South Africa. A permanent residence would be a place where belongings are stored and to which you return regularly after periods of temporary absence. Note a continual presence is not required to be ordinarily resident in South Africa.
If you don’t meet the requirements for the residency test, then your physical presence is taken into account. Spending more than 183 days in South Africa will automatically deem you a South African tax resident.
Physical Presence Test
This is a time-based test and applies to South Africans who do not ordinarily reside in South Africa during the relevant tax year. (They don’t return to a permanent home regularly) The test considers the number of days a natural person is physically present in South Africa during any given tax year. It is performed annually and consists of three requirements. A Saffa would need to be physically present in South Africa for a period or periods which exceed:
- 91 days in total during the tax year under consideration;
- 91 days in total during each of the five tax years preceding the tax year under review.
- 915 days in total during the above five preceding tax years.
In summary, if your permanent home and possessions are based abroad and the time you spend in South Africa is less than the limited number of days allowed, you won’t be considered a South African tax resident.
Now that we’ve clarified the rules for tax residency let’s look at the exemptions for SA expats living abroad.
Exemption explained for expats with permanent residency
Depending on the type of residency held determines whether you are subject to tax in South Africa. For instance, if you have permanent residency in the UK, you will not satisfy the South African residency or physical presence test and, therefore, will not be subject to tax in South Africa. However, you will, of course, be subject to tax in the UK as you are now considered a UK tax resident.
Expat South African tax residents
Some South Africans working abroad fall into the category that is affected by the tax legislation. These will be South Africans who have not formalised their financial emigration and are considered South African tax residents because they return to South Africa regularly and meet the ‘ordinarily’ residency test or ‘physically’ present test requirements. An excellent example would be South African expats working abroad on a contractual basis, leaving their families to live in South Africa while working and sending funds home. This would mean they are subject to South African tax legislation and are required to pay taxes.
Tax laws for South African tax residents abroad
Tax legislation regarding foreign income changed in South Africa and became effective in March 2020. This states that the first R1.25 million earned from a foreign job will be exempt from tax in South Africa. With the proviso that 183 days and more are spent outside South Africa’s borders spanning a period of twelve months. In addition, 60 of the 183 days should concurrently be spent outside of South Africa.
Check out our simplified example:
A South African tax resident works in the UK and earns the equivalent of R1.3million per annum. This expat does not enter South Africa’s borders during the 2021 year of assessment.
The expat will be subject to the tax laws of the UK and pay monthly tax on the income earned. The expat will also need to declare the R1.3millon earned in the UK on their South African tax return for the 2021 assessment period.
The first R1.25 million is exempt from South African income tax. However, the additional R50 000 will be subject to South African income tax.
Although this looks like double taxation, South African tax residents can claim a tax credit in South Africa for taxes already paid on the income portion over the R1.25 million threshold to avoid double taxation.
Obviously, this is a simple example and does not consider the many complexities of financial emigration, residency status, and subsequent tax requirements that could arise. Every individual’s circumstances are different; therefore, it’s always best to seek advice if you are earning foreign currency or looking to financially emigrate from South Africa.
Expert financial advice for expats right here at FinGlobal
FinGlobal is accredited to advise on all aspects of South African tax law. Our services include tax refund advice to avoid double taxation, information on tax exit, and compliance with tax clearance requirements. Additionally, we can assist with various South African tax services, including reactivating and updating tax records, submitting tax returns, and calculating capital gains tax. Therefore, if you are an expat in need of tax assistance while living abroad, we can assist with every step. Furthermore, we customise our advice to meet your unique tax and financial planning needs.
Our licensed, professional advisors have over ten years of experience in the industry and continue to assist South African expats with all their financial and tax needs. Contact our team today for friendly and professional advice about your emigration requirements.
To discuss your unique needs with our team, simply get in touch with us. Give us a call on +27 28 312 2764 or send us an email at email@example.com, and we will assist you promptly.