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South African employed abroad? How does the foreign income exemption work?

By February 2, 2022October 11th, 2023FinGlobal

South African employed abroad? How does the foreign income exemption work?

February 2, 2022

First tax year working abroad? Here’s what you need to know about expat tax back in South Africa to ensure you stay on the right side of the law when it comes to income tax.

Is foreign income taxable in South Africa?

South Africa has a residence-based tax system, which means that if you are considered a resident for tax purposes, you will be expected to pay tax in South Africa on both locally sourced and foreign employment income.

This was not always the case. Before 1 March 2020, South Africans working abroad could make use of the foreign employment income exemption to avoid tax entirely, but this has changed. Section 10(1)(o)(ii) of the Income Tax Act 1962 was amended to bring South Africans working abroad back into the tax net from 1 March 2020. Under the updated law, only R1.25 million of the foreign employment income earned by the tax resident in a tax year can qualify for an exemption, so long as “days” requirements are met.  This means that income that exceeds the threshold of R1.25 million will be taxed back in South Africa according to the tax tables that apply in that particular assessment year.

Who does the foreign income exemption apply to?

This exemption applies to you as a South African tax resident if you are an employee who 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, which includes an unbroken stretch of more than 60 full days outside South Africa within that time frame.

It is important to note that the exemption does not apply to:

  • Tax non-residents
  • Any employee in the public sector
  • A person who holds public office
  • independent contractors (their income is not considered remuneration)

What type of foreign income is covered?

The following types of income fall with the definition of the exemption:

  • Salary;
  • Taxable benefits;
  • Leave pay;
  • Wage;
  • Overtime pay;
  • Bonus;
  • Gratuity;
  • Commission;
  • Fee;
  • Emolument;
  • Allowance, including travel allowances, advances and reimbursements;
  • Amounts derived from broad-based employee share plans; or
  • Amounts received in respect of a share vesting.

How does the foreign income exemption work?

It’s important to note that the exemption does not apply to your foreign employment income automatically. Nor does it mean that you don’t have to declare the exempt R1.25 million on your tax return.

As a South African tax resident temporarily abroad, you will still be expected to file a tax return back in South Africa and declare your foreign employment income (all of it), and request that the exemption be applied in your favour to the first R1.25 million you earned. You will be required to show that you qualify for this tax relief, which will then be deducted from your South African liability in the form of a tax credit.

What about double taxation? Am I going to get taxed twice?

Yes, if you earn employment income that exceeds the R1.25 million threshold and the Double Tax Agreement between South Africa and the foreign country does not clearly assign an exclusive taxing right to one country, then both countries will have a right to tax your income. In such a case, the portion of your income in excess of R1.25 million may end up being double-taxed. Ouch.

How does double taxation work?

The country of source enjoys the first right to tax your employment income and the country of residence, in your case South Africa, will provide double tax relief in the form of a foreign tax credit to the extent that tax was paid in both countries.

Read our guide to Double Tax Agreements here.

What relief can you claim for double tax?

Section 6 of the Income Tax Act allows residents to seek relief from double tax where the income received for services rendered outside the Republic is subject to tax in South Africa and in the foreign country.  This allows South African tax residents to apply for a tax credit while filing their income tax returns, provided the time-based requirements are met.  It is also possible for your employer to apply for a directive from SARS to take into account the potential section 6 credit on a monthly basis to determine the employees’ tax liability, in terms of paragraph 10 of the Fourth Schedule of the Act.

FinGlobal: tax specialists for South Africans abroad

Life is stressful enough without having to deal with tax compliance in two countries, which is why outsourcing this double headache to the professionals is a smart idea. Our team of expert cross-border financial service providers would love to help you:

  • Determine your potential tax exposure and provide you with objective advice on your tax filing and payment obligations.
  • Complete and submit all South African tax returns, and deal with all your tax matters, including tax clearance and tax refunds.

Got questions? FinGlobal can help you better understand your tax obligations as a South African working abroad. Leave us your contact details and we’ll be in touch to discuss your requirements.

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