Let’s face it – no one wants to be taxed twice on their hard-earned income, but if you’re a South African tax resident earning a foreign income abroad it’s a very real possibility for you. To avoid unfair taxation and to provide a measure of relief, the Australian tax authority has concluded a tax treaty with South Africa. So what does this double tax agreement say, and how does it apply to you? Let’s dive into the facts.
Does South Africa have a double tax agreement with Australia?
Yes. As mentioned, the two governments entered into an agreement in order to avoid their citizens being double taxed, and to prevent tax residents from committing tax evasion in either of the respective jurisdictions. In other words, they acknowledge that double taxation is not exactly fair, but they also acknowledge that it’s important to ensure that individuals who qualify to be taxed in two jurisdictions are not given the opportunity to manipulate the law in their favour to avoid paying tax altogether.
What does the double tax agreement between Australia and South Africa say?
- This DTA applies to persons who are residents of one or both of the contracting parties (these being Australia and South Africa).
- It applies to the following existing taxes:
- In Australia: the income tax, and the resource rent tax that is payable for offshore projects relevant to exploration or exploitation of petroleum resources.
- In South Africa: the normal income tax for individuals and the secondary tax on companies.
The Double Tax Agreement states that a resident may be taxed by the foreign country in which their services are rendered as part of an employment agreement, subject to the provisions of the double taxation agreement in place between the two countries. So, for example, where a South African tax resident performs employment services in Australia, according to the DTA, this individual will be taxed exclusively in South Africa only where they meet a number of conditions:
- As an individual, the employee must be physically present in Australia for a period not longer than 183 days in any 12-month period
- The employer may not be a resident of Australia nor may any permanent establishment that he/she owns be eligible to claim an income tax deduction in Australia for the salary expenses incurred in paying that employee.
What does this actually mean in practical terms?
- An individual employee will be taxed in Australia on their income if that person is physically present in Australia for more than 183 days during a 12-month period.
- This amount will then be taxed in South Africa as well since a resident is taxed on their worldwide income due to South Africa having a residence-based tax system.
- In this situation, the amount earned will be subject to normal income tax in both countries.
Okay, but aren’t we trying to avoid being double taxed in South Africa and Australia?
Yes. As such, in order to prevent double taxation occuring in such a situation, the individual employee may be eligible to utilise an exemption for South African income tax purposes, provided they meet all the requirements to do so.
Here it is important to note the following about the double tax treaty between South Africa and Australia:
- The exemption only applies if income meets the definition of “remuneration”, as contained in paragraph 1 of the Fourth Schedule. As such, the exemption is only applicable if the individual has earned a salary or some other income that relates to employment.
- The individual must remain physically outside of South Africa for more than 183 full days within a 12-month period, of which 60 days must be unbroken.
- Employment services must have been rendered during this 183-day period.
It is worth pointing out that the double tax agreement between Australia and SA does not say:
- That employment services must be rendered continuously during the whole period of absence from South Africa.
- As such, a person can still be eligible to use this exemption where their services were rendered during a part of this period, even if part thereof was used for other purposes (such as a holiday).
- That a person is not allowed to remain in the foreign country purely for the purposes of meeting the 183-day requirement.
- Additionally, the double tax agreement does not say that the person needs to remain in only one country for the 183-days. The fact that it only says ‘absence’ from South Africa is required means that as long as the person is absent from South Africa and does not return for a continuous period of 60 full days, the exemption will be granted.
In deciding whether an individual has met the time-based requirements of the double tax agreement, the following applies:
- A “full day” means a total period of 24 hours; from 24:00 to 12:00.
- A “month” is a full calendar month.
- The 12-month period does not refer to the year of assessment, and can be taken to mean any continuous period of 12 calendar months.
The final requirement states that services must be rendered for (or on behalf) of an employer. From this, we can deduce that the exemption does not apply if a person is self-employed and he receives income for services carried out in the foreign country. The exemption will not apply to services that are rendered by an employee of the South African government, or by an individual who holds a public office.
From the above it is clear that when a South African resident performs services in a foreign country as a result of employment, the time-based requirements need to be carefully considered to accurately determine whether the exemption is available for use. It can easily be negated where the taxpayer makes the mistake of returning to South Africa on a regular basis to visit family, which means that the exemption can be forfeited because that person did not remain in Australia for the full unbroken minimum period of 60 days.
FinGlobal: tax specialists for South Africans earning abroad
Confused as to your tax status and where you should be paying tax? FinGlobal can help you make sense of the double tax agreement between South Africa and Australia to ensure that you aren’t unduly taxed in either country until you’re ready to complete your tax emigration from South Africa.
To see how we can be of assistance in smoothing out your tax affairs and ensuring your compliance in two tax jurisdictions, leave us your contact details in the form below and we’ll be in touch.