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Hot question: my spouse works overseas, what are the implications for expat double taxation?

By December 21, 2023FinGlobal

Hot question: my spouse works overseas, what are the implications for expat double taxation?

December 21, 2023

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As the cost of living in South Africa continues to soar, it’s becoming an increasingly common scenario: one spouse remains in South Africa while the other works abroad, sending money home. If this is something you and your spouse are considering, or it’s a move you’ve made recently, it’s important to understand the specific tax implications of your decision. This is because there is no longer a complete blanket tax exemption available to South Africans earning a foreign income as the South African Revenue Service has brought worldwide income back into the tax net. This means that South African tax residents earning an income overseas will be required to give SARS a cut of their foreign income pie, which has become known as ‘expat tax’.

What does this mean for you specifically? Let’s take a look at expat double taxation.

Marriage and tax in South Africa

Unless you make a deliberate choice to the contrary and sign an antenuptial contract, marriages in South Africa automatically default to the ‘in community of property’ regime, which means entering the marriage as equal partners, sharing all assets and finances on a 50/50 basis.

Opting for this arrangement carries significant tax implications, particularly for South Africans earning abroad. It is important to familiarise yourself with the nuances of tax planning in South Africa when earning a foreign income in order to preemptively avoid possible administrative penalties from SARS, as the revenue authority is only getting more efficient at sniffing out and collecting expat taxes.

Previously, South Africans could apply for tax exemption on their foreign earnings as a whole where they met certain time-away-from-home requirements. Currently, South African tax residents rendering employment services abroad can still access this exemption by meeting the time-based requirements, but only the first R1.25million earned can be declared tax exempt. Any foreign income over and above that R1.25 million threshold is now taxable in South Africa according to an individual personal margin based on the relevant tax tables for the tax year under assessment.

The following income will qualify for tax relief in terms of the Income Tax Act:

  • Salary; including taxable benefits; leave pay and wages
  • Overtime pay; bonuses; gratuities; commissions and fees
  • Emolument and allowances, including travel allowances, advances and reimbursements
  • Amounts received from broad-based employee share plans, or
  • Money received in respect of a share vesting.

Why is this important to know? Because as a South African living abroad, you’ll be expected to pay tax as long as you’re a tax resident unless you cease your tax residency at SARS. Given that one spouse is earning abroad and the other remains in South Africa (in your habitual abode), it’s unlikely that SARS will agree to let you cease your tax residency.

Read more: What does it mean to be a South African tax resident temporarily abroad?

What are the tax implications of being married in community of property?

When married in community of property, taxation involves being assessed by SARS on half of both your individual plus your spouse’s interest, dividend, rental income, and capital gains. Despite this shared approach to certain assets, income tax is still applied individually to each person.

How does expat tax affect couples married in community of property?

If you’re a married couple and your spouse works abroad while you remain in South Africa, this could affect your tax situation. If your spouse is still a tax resident of South Africa (and it’s likely that they are, because SARS will assume that they will return home to you at the end of their travels and thus their intention is not to cease tax residency) it is possible that your spouse will be taxed on their income both in South Africa and the country in which they are working and earning a foreign income.

How is this possible? Double taxation occurs because South Africa has a residence-based tax system, which allows SARS to tax its residents on all income regardless of where it was earned. Doubtless, the country in which your spouse is earning a foreign income has its own set of income tax laws, and this is where it can get complicated. If there is no Double Tax Agreement (DTA) in place between South Africa and the country of foreign employment, double taxation is likely.

However, SARS does offer a measure of relief in such circumstances. Resident taxpayers earning a foreign income can apply to SARS to have up to R1.25 million of their income exempt from tax. Any income earned in excess of this threshold is taxable by both revenue authorities unless there is a clear rule in place that gives either country the right to tax you first. However, it is important to note that any DTA in place with South Africa do not rule out double taxation entirely, in most cases. They are simply there to lessen the blow, by providing some tax relief.

What does a Double Tax Agreement do?

A Double Tax Agreement (DTA), also commonly referred to as a tax treaty, is an agreement between South Africa and other countries that aim to minimise the impact of double taxation on income and capital gains earned by residents of either country. Here’s a quick breakdown of its key functions:

1. Preventing double taxation:

  • Tax residency: DTAs determine which country has the right to tax an individual or business based on their residency status, which helps avoid situations where the same income is taxed twice, once in each country.
  • Tax relief methods: DTAs offer various methods to prevent double taxation, such as:
    a. Exemption method: One country exempts certain types of income earned in the other country from taxation.
    b. Tax credit method: The country where the income is earned allows a credit for taxes paid in the other country.
    c. Reduced tax rates: DTAs may negotiate lower tax rates for specific types of income earned by residents of the other country.

What is a 6quat tax rebate?

A 6quat rebate is a form of tax relief available in South Africa that helps residents avoid double taxation on income earned from foreign sources. It’s named after section 6quat of the Income Tax Act 58 of 1962, which controls how the rebate plays out in real life.

Here’s how a 6quat tax rebate works when it comes to double taxation in South Africa:

When you earn income from a foreign source (like a job abroad, investments and so forth.), you usually have to pay tax on it in both the foreign country and South Africa. This can be unfair, so the 6quat tax rebate helps alleviate that burden. The rebate allows you to deduct certain foreign taxes you’ve paid from your South African tax liability. This effectively reduces the amount of tax you pay in South Africa on your foreign income.

There are some conditions to qualify for the 6quat tax rebate:

  • The income must be from a specific list of sources mentioned in section 6quat, like employment, dividends, rentals, etc.
  • The foreign taxes must be “qualifying foreign taxes,” meaning they’re income taxes paid to a recognised foreign government.
  • As such, you must have paid the foreign taxes and have proof of payment.

Here are some benefits of claiming the 6quat tax rebate:

  • Reduced tax liability: You’ll pay less tax overall on your foreign income.
  • Improved cash flow: You’ll get a tax refund if the foreign taxes you paid exceed the South African tax on your foreign income.
  • Compliance with tax law: Claiming the rebate ensures you’re on the right side of South African tax regulations.

Marriage out of community of property (with or without accrual)

This form of marriage occurs when you enter into a marriage with an antenuptial contract in place. In this arrangement, all assets and liabilities will not be merged into a single estate; instead, each spouse remains responsible for their individual assets and debts.

If you opt for this marital structure, you and your spouse will both be subject to separate taxation on your individual incomes. This means that your spouse’s income will have no impact on your own tax liability and any investment income, rental income, or capital gains earned in your name will be taxed entirely in your hands. However, double taxation in South Africa is still a possibility for your spouse earning a foreign income.

What about your spouse sending money to you in South Africa? How is that taxed?

In South Africa, donations between spouses are exempt from donations tax. This means that your spouse can transfer any amount of money or property to you without incurring any donations tax liability. This exemption applies to both same-sex and opposite-sex spouses. There are no specific formalities required to make such a donation to your spouse, but it is smart to keep some form of documentation, such as a bank statement or a written agreement, to support the fact that a donation was made. This will prove helpful if you are ever audited by SARS.

FinGlobal: cross-border financial specialists for South Africans

If the thought of managing compliance in two different tax jurisdictions has you stressed, FinGlobal is here to help. Our team of dedicated cross-border financial and tax specialists will ensure that your tax affairs are up-to-date. With FinGlobal, you will also get all the help you need to ensure that your double taxation obligations are minimised.

To learn more about our convenient, hassle-free services please leave your contact details below and we will be in touch to discuss your specific requirements. Alternatively, send us an email to info@finglobal.com with all your South African tax related questions.

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