Until you have officially terminated your tax residency with the South African Revenue Service (SARS), you are still technically a South African tax resident, even if you’re living overseas. What does this mean? This means that you have an obligation to SARS to pay tax on your foreign employment income, as well as any income sourced in South Africa. The only way to cease your tax obligation to SARS is to complete the process of tax emigration. While you are still a tax resident, however, you might qualify for tax relief in the form of the foreign employment income exemption.
South African tax residency: do I pay tax if I live and work overseas?
As a recent emigrant from South Africa, you will be expected to pay tax on all of your income regardless of where it is earned, until you become a non-resident for tax purposes.
Becoming a non-resident for tax purposes means that you no longer meet the requirements of either the ordinarily resident test or the physical presence test that SARS uses to determine tax residency status. Once you no longer meet the requirements of any one of the tests, you become eligible to cease your tax residency with SARS.
What is the foreign income exemption in South Africa?
South African tax residents abroad might qualify to have the first R1.25 million earned in foreign employment excluded from their income tax calculation at SARS, provided that they meet all of the necessary requirements. Section 10(1)(o)(ii) of the South African Income Tax Act makes provision for such an exemption from income tax for foreign employment income received by a South African tax resident.
Who can use the foreign employment income exemption in South Africa?
This foreign employment income exemption is available to you only if the following requirements are met:
- You qualify as a South African tax resident.
- You perform employment services outside South Africa on behalf of an employer (it does not matter if the employer is South African or foreign)
- You spend at least 183 full days physically outside of the borders of South Africa in any 12-month period.
- You spend at least 60 consecutive full days outside the Republic within a period of 12 months.
If all four requirements are met, the entire portion of your income relating to services delivered overseas will qualify to be exempted from income tax in South Africa. This exemption is capped at R1.25 million per annum, and any foreign employment income earned above this threshold of R1.25 million will be taxed in South Africa according to your normal tax rate for that assessment year.
Who does the 183-day tax rule apply to?
Individuals who meet the requirements for South African tax residency who earn foreign income abroad, must meet the conditions of the 183 day tax rule if they intend to use the foreign employment exemption outlined in section 10(1)(o)(ii) of the Income Tax Act. However, the exemption can only be applied to specific types of foreign employment income, such as salaries, taxable benefits, leave pay, wages, overtime pay, bonus pay, gratuities, commissions, fees, emoluments, allowances (including travel allowances, advancements and reimbursements) as well as amounts paid out from broad-based employee share plans or received due to a shares vesting.
Accordingly, the exemption and the 183 day tax rule as a result, is not applicable to independent contractors, freelancers, or individuals who operate as self-employed entities.
What other considerations are relevant to the 183 day tax rule?
When applying the 183 day rule to evaluate whether an individual is eligible to use the foreign employment income exemption, it must be pointed out that –
- The 183 day tax rule includes every calendar day that passes, not just working days.
- This means that weekends, public holidays, annual leave, sick leave, and off-duty time spent abroad (while in employment) all add up toward meeting the 183-day time requirement.
- The 12-month period is not restricted to a calendar year, fiscal year or tax year, it is essentially any sequence of 12 successive months.
FinGlobal: tax specialists for South Africans abroad
Need help with your cross-border tax affairs? Sitting with a complicated tax scenario that’s causing you nothing but stress? We’re here to save the day. FinGlobal specialises in expat tax compliance, tax clearance for international transfers, tax refunds, tax emigration, and an array of related services for South Africans living abroad.
Kindly leave us your contact information, and we’ll be in touch to evaluate your circumstances and see how we can best be of service. You can also send us an email to firstname.lastname@example.org with your financial and tax emigration questions.