With legislative updates that were designed to bring South African tax residents working abroad back into the South African tax net, it’s important to be aware of how the Taxation Laws Amendment Act of 2020 affects you. This is because South Africans earning abroad can no longer expect full exemption on their foreign employment earnings, and where they meet the requirements for tax residency South Africans will be expected to pay expat tax back home.
Tax emigration South Africa
Do I have to pay tax in South Africa if I work abroad?
Previously, South African tax residents working abroad could claim tax exemption on income earned abroad, as long as they met the requirements of the 183 day rule of being physically outside SA. Now, South Africans earning foreign employment income will be expected to pay tax of up to 45% (according to individual margins) if they meet the requirements for tax residency back in South Africa. However, there is some relief to be found in a limited exemption in terms of which individuals will only be taxed on their income where it is more than R1.25 million per year.
How does the foreign income exemption work now?
Section 10 of the Income Tax Act details a list of circumstances under which income earned (a portion of it, anyway) for employment services outside of South Africa is eligible for exemption from income tax. This exemption is capped at R 1.25 million per annum from 1 March 2020. The R1.25 million exemption may seem like a generous concession but, in reality, will be quickly exhausted given that it includes package benefits such as accommodation, travel allowances, security, etc.
When is foreign income not taxable in South Africa?
A portion of your income up to R1.25 million can be excluded from your South African tax liability if you meet the following conditions:
- You have a formal contract of employment
- You are a South African tax resident
- You earn a certain type of remuneration
- You spend at least 183 days (+/- 26 weeks, or roughly 6 months) in a consecutive 12-month period outside of SA providing services to your foreign employer, and
- Of 183 days, at least 60 of them must be consecutive, or unbroken.
As a South African tax resident, you must declare your foreign income to claim the tax exemption
- This R1.25 million tax exemption does not automatically apply in your favour, and you must still include this amount in the tax return you file with the South African Revenue Service (SARS).
- You will now have to declare your foreign income and get permission from SARS to use the exemption (you must show that you meet all the necessary requirements to do so) which will then be deducted from your South African liability in the form of a tax credit.
Important to note: the expat tax exemption only applies to foreign employment income
- The Taxation Laws Amendment Act only applies to individuals earning foreign employment income – this means there must be an employer/employee contractual relationship in place.
- This means that the exemption cannot be relied upon by independent contractors, freelancers or individuals who are self-employed and earning an income outside South Africa.
How do I know if I am a South African tax resident?
Expat tax only applies to South African tax residents. This means that if you are currently working outside of SA, you’ll need to ascertain whether SARS is likely to view you as a resident in South Africa for tax purposes.
You are a tax resident in South Africa if either of the following residency tests applies to your situation:
- You are “ordinarily resident” in South Africa; or
- You meet the requirements of the physical presence test, even if you are not ordinarily resident in a specific tax year.
What does ordinarily resident mean? It means that deep down, you still consider South Africa your true home. It’s where your roots are, and you intend to return home at some point in the future. “Ordinarily resident” is not a concept that is clearly defined, and it is evaluated on a case-by-case basis. If you assert that you are not ordinarily resident in South Africa, all of the evidence you put forward must clearly support your claim.
What is the physical presence test? You are “physically present” in South Africa, and therefore a tax resident, if you have been on South African soil for more than 91 days in that tax year, and each of the five preceding tax years, as well as for a total of more than 915 days in those preceding five years. This test only applies if you are not considered ordinarily resident in South Africa.
How do I break my South African tax residency?
- Tax emigration is the process of informing SARS that you are exiting the South African tax system and taking up residency in another tax jurisdiction. Through this process, you request that SARS no longer view you as a tax resident for income tax purposes; notifying them that they should view you instead as a non-resident.
- You are no longer a tax resident according to the physical presence test when you leave South Africa and remain physically outside of the country for a continuous period of at least 330 full days.
- Should I cease tax residency in South Africa if I have moved abroad?
- What happens if I don’t complete tax emigration and I live overseas?
- What are the tax implications of ceasing to be a tax resident in SA?
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Achieving tax compliance and managing your financial affairs in two different tax jurisdictions shouldn’t be something that keeps you up at night but if you’ve just recently relocated, it’s going to be your reality until you’re eligible to cease tax residency in South Africa which can get complicated. That’s where FinGlobal can help. We’re ready to take that worry off your plate, providing expert assistance with all your tax-related requirements.
Get in touch today to start your free, no-strings-attached SARS tax residency assessment and to see how we can ease your transition and simplify your financial future.