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Tax implications for independent South African contractor vs South African employee working abroad – Who does not qualify for the expat exemption

By March 15, 2023October 5th, 2023FinGlobal

Tax implications for independent South African contractor vs South African employee working abroad – Who does not qualify for the expat exemption

March 15, 2023

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Foreign income tax exemption involves being free from or not subject to taxation by the South African Revenue Service (SARS) for remuneration earned for services rendered outside South African borders. The foreign income exemption is stipulated in section 10(1)(o)(ii) of the Income Tax Act. According to the s10(1)(o)(ii) exemption, it will only apply when an employment contract exists. So what does it mean for independent South African contractors working abroad? Do contract workers pay tax in South Africa, and who does not qualify for the expat exemption? Let’s take a look at the tax implications.

Is there a tax on foreign income?

Yes. South Africa moved from a source-based to a residence-based tax system in 2001. The change made tax on foreign income possible, meaning tax residents must pay tax on worldwide income, no matter where it is sourced or paid. You can be deemed a tax resident for purposes of foreign income tax either through ordinary residence or physical presence.

However, an exemption from tax on foreign income exists where you’ll not be required to pay tax in South Africa for all or a portion of your foreign income.

What is the expat tax exemption?

The foreign earnings exemption excludes foreign employment income received for services rendered outside South Africa from South African tax, provided various requirements are met. The exemption became limited to R1.25 million from March 2020, meaning if you earn R1.25 million or less, the full amount is exempt from normal tax in South Africa. However, any excess above this amount will be subject to normal tax in South Africa, even if you’re paying tax in another country.

Requirements for foreign income tax exemption South Africa

The foreign income tax exemption only applies if:

● You’re a South African tax resident
● You’re an employee rendering employment services
● You earn certain types of remuneration like a salary, taxable benefits, leave pay, wage, bonus, overtime pay, commission, gratuity, or emolument.
● You’ve rendered services outside South Africa for over 183 full days in any 12 months and a continuous period of over 60 full days during the 12 months.

Who does not qualify for the expat exemption?

The exemption doesn’t apply to non-residents, public office holders appointed or deemed appointed by an Act of Parliament, employees in the national, local or provincial spheres of government, constitutional institutions, or municipal and public entities.

Independent contractors and self-employed individuals also don’t qualify for the exemption since they’re not in any employment relationship.

Is there a tax on investment income?

Yes. Investors must pay tax when they earn income on their investments. The different types of investment income that have income tax consequences include local and foreign interest, interest from real estate investments, foreign dividends and capital gains. The sale of investments triggers a capital gains tax, and dividends earned from local companies attract a dividend withholding tax (DWT), which is automatically withheld by the company paying the dividend.

Your marginal income tax rate and the type and amount of investment income and capital gains you earn from your investment will determine the actual tax you pay. Generally, you’ll pay more tax if you have a higher marginal income tax rate. Ensure you get a tax certificate from your financial institution if you own investments and use it to complete the investment section on the tax return. It ensures accurate calculations of your taxable income.

What is the tax on foreign dividends?

If you’re a South African resident earning foreign dividends, you must declare the dividend when submitting your South African tax return. Foreign dividend tax will depend on the amount and types of shares held in the foreign company. Most dividends received from foreign companies will not be taxable if the South African taxpayer holds at least 10% of the foreign company’s equity shares and voting rights. Most other dividends received are subject to an effective tax rate of 20%.
You must show the full dividend on the tax return and declare any foreign tax you’ve paid on the dividend, and SARS can reduce the local tax by the foreign tax paid. Is There Tax On Rental Property?

Yes. If you rent out a property locally or abroad and receive rental income, the amount you receive is subject to income tax. Tax on rental property is calculated by adding the rental income to your other income and reducing the allowable expenses incurred. You can claim expenses incurred in producing rental income, including agency fees for estate agents, advertisements, insurance, security, repairs, rates and taxes or garden services.

Other amounts paid for the rental of the property, in addition to monthly rent, are also subject to income tax. The country where your property is located will likely deduct or withhold taxes from your rental income, and you can deduct them as a foreign tax credit to avoid double taxation.

A foreign income tax calculator can help you work out everything you need to know about your tax, how much you owe SARS and what rates you’ll pay. Most tax calculators are free to use and suitable for individuals and companies.

Use FinGlobal for help with your taxes and more!

Expert advisors at FinGlobal make it super easy to understand and comply with tax implications whether you’re an independent South African contractor or an employee working abroad. Whether it’s tax emigration, tax clearance or tax refunds, FinGlobal can take care of all your tax needs and ensure you’re compliant in your current country and South Africa. With years of experience helping thousands of clients in over 100 countries, you can rest assured you’re in the right hands.

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