For South Africans thinking about their international relocation, tax planning is one of the most important things you can do to prepare for leaving the country. This is because jetting out of the Republic does not cut your ties with the South African Revenue Service (SARS), and the tax authority will expect to continue to tax you on your worldwide income until you cease to be a tax resident officially.
To avoid any nasty tax surprises, here’s what you need to know as a South African tax resident who has moved abroad in the last year or so.
Do I pay tax on foreign income in South Africa if I live overseas?
South Africa has a residence-based system when it comes to tax. This means that SARS can tax you if you are still considered a tax resident in the Republic. You can still be considered a tax resident even if you have moved away from the Republic.
What does this mean? This means that if you meet the SARS requirements of tax residency – either you are ordinarily resident or physically present – in South Africa you are going to be taxed on your income, regardless of where it is earned or paid. This means that you will be taxed on income with a local source, and foreign income earned from working overseas.
Generally speaking, you will meet the requirements for tax residency for at least the first 365 days that you are living abroad, after which you are eligible to begin the process of tax emigration, which changes your status from resident to non-resident for tax purposes.
How do I declare my foreign income on my tax return in South Africa?
As long as you are still considered a tax resident, you will still need to file a tax return in South Africa, declaring all of your income – foreign and local. At this point, you can make use of the exemption contained in section 10(1)(o)(ii) of the Income Tax Act as long as you meet all of the requirements to do so.
This means that SARS will disregard a portion of your foreign income, and only tax you on the amount that exceeds the threshold limit.
How much foreign income is tax free in South Africa?
South Africans who meet the requirements of the section 10(1)(o)(ii) exemption (also known as the foreign income exemption or expat tax exemption) can make use of this tax relief to effectively render R1.25 million of their foreign employment income tax free.
This exemption does not apply automatically, and individuals seeking to use this tax relief must ensure that they meet all of the requirements.
What is the expat tax exemption in South Africa?
A portion of an individual’s foreign income can be declared exempt from South African tax if the individual:
- Is a South African tax resident
- Holds a formal employment contract (either with a resident or non-resident employer)
- Earns a certain type of remuneration
- Spends a minimum of 183 days (roughly 26 weeks, or about 6 months) in a consecutive 12-month period outside of South Africa rendering services to your foreign employer, of which at least 60 days are uninterrupted.
How does the foreign income exemption work in South Africa?
To clarify, only R1.25 million earned abroad in foreign employment can be exempt from tax in South Africa, as long as 183 days are spent outside South Africa in a 12-month period of which 60 days are unbroken.
- Practically speaking, this means any foreign service income above this R1.25 million threshold will be taxed in South Africa at the individual tax resident’s marginal tax rate.
- To use this tax relief you must declare your entire foreign income and seek permission from SARS to have the exemption applied to your income, having proven that you meet all the necessary time and employment conditions to do so. This will be deducted from your South African tax liability in the form of a tax credit.
The foreign employment income exemption cannot be used by:
- Independent contractors
- Self-employed individuals
This is because one of the requirements of using this tax relief is that there be a formal employment agreement in place.
What happens if you don’t declare your foreign income in South Africa? SARS will find you. Have no doubt about that. Read more, here.
FinGlobal: providing tax assistance for South Africans around the world
Got a complicated relationship with SARS? Need a hand exiting the South African tax system? We can help you ensure that you are compliant with all the expat tax requirements, and assist you with tax clearance or tax refunds.
Get your tax worries taken care of today. Leave your contact details and one of our tax specialists will be in touch to discuss your requirements.