As more South Africans are taking off around the world in search of new career opportunities or different ways of living, it is becoming increasingly important for us to have conversations around the practical implications of these moves. As exciting as international relocation can be, it’s important to remember that there are always tax consequences and considerations for South African tax residents, even when living abroad.
It’s not simply a case of leaving your tax worries behind when your plane takes off. In fact, your tax obligation will follow you no matter where you travel, as long as you are considered a South African tax resident. So what does this mean if you’re a freshly-minted South African emigrant working abroad? Let’s take a look at the tax implications.
Foreign income exemption
South Africa has a residence-based tax system
This means that your tax obligation is linked to your tax resident status. Here, there are three main classifications, which determine your treatment by the South African Revenue Service (SARS).
- Tax resident: this means that you meet either the ordinarily resident or physically present tests. You will be expected to pay tax on both foreign and locally sourced income.
- Tax non-resident: you do not meet the residency tests, which means that you are considered a non-resident for tax purposes, and you will be taxed only on your income with a South African source.
- Tax resident temporarily abroad: You are a South African living and working abroad, but you have not yet failed to meet the requirements of the ordinarily resident or physically present tests, and you are yet to become tax resident in another country. Your relocation is not yet permanent. You will be taxed on both your worldwide (foreign) income and any income with a South African source.
Is foreign income taxed in South Africa?
While this was not always the case, from 2020 onward, foreign income became taxable in South Africa. In a residence-based system, tax residents are taxed on all local and foreign income received no matter where it is paid or sourced.
There is some relief, however, in the form of a foreign income exemption that can be applied (if all the conditions are met) in order to render a portion exempt from South African tax.
How much foreign income is tax free in South Africa?
Effective from 1 March 2020, only the first R1.25 million earned in foreign employment income will be exempt from tax in South Africa, provided that more than 183 days are spent outside South Africa in any 12-month period and, during this period, 60 days must be unbroken and continuously spent outside SA.
What does the foreign employment income exemption mean?
Section 10(1)(o)(ii) makes provision for an exemption to be applied to foreign employment income received for services rendered outside South Africa, as long as the requirements are met. Any income that exceeds the exemption cap will be subject to normal tax in South Africa, irrespective of whether tax is paid in another country. Relief from double tax is available under domestic tax law by means of a Section 6 credit (subject to limitations) or according to any applicable tax treaty provisions.
What requirements must you meet in order to qualify for the foreign income exemption?
In order to qualify to utilise this exemption, you must –
- Be a tax resident of South Africa
- Earn certain types of remuneration
- For services rendered in terms of an employment contract
- That is outside of South Africa for qualifying periods of time
- Without being subject to an exclusion.
Who does the foreign income exemption apply to?
The exemption only applies to a tax resident of South Africa who is an employee rendering services outside of the Republic.
Who does the foreign income exemption not apply to?
The exemption does not apply to an individual who is a non-resident for tax purposes as foreign sourced income is not taxable in SA.
The following categories of individuals are further excluded from the exemption:
- Holders of public office, public servants and government employees.
- Independent contractors and individuals who are self-employed, as such persons are not in an employment relationship.
What type of income qualifies for the foreign income exemption?
The following amounts fall within the scope of the exemption:
- Salary, wages, leave pay
- Taxable benefits
- Overtime pay
- Bonus, gratuity
- Commission, fee
- Allowance (including travel allowances, advances and reimbursements)
- Amounts derived from broad-based employee share plans
- Amounts received in respect of a share vesting
What are the time requirements that must be met to qualify for the foreign income exemption?
An employee who is a tax resident in South Africa must be outside South Africa for a period or periods exceeding 183 full days (in total) during any 12-month period, as well as for a continuous, unbroken period of 60 days during that 12-month period.
Important to note about the foreign income exemption:
- It is not relief that applies automatically. Your entire income amount must be declared in your South African tax return and you must request that the foreign income exemption be applied to the first R1.25 million.
- You must be able to show that you meet the time-based requirements in order to qualify for the exemption.
FinGlobal: tax specialists for South Africans abroad
Need a hand getting a handle on tax compliance in two jurisdictions now that you’re working abroad? Cross-border compliance is our specialty. We can take care of your tax needs – from tax clearance, to tax refunds and even your tax emigration when you’re ready.
Leave us your contact details and we’ll be in touch to find out how we can assist you to simplify your tax affairs.