
Are you a South African working abroad? If so, you might be eligible for a significant tax break. The South African Revenue Service (SARS) has a unique tax system for citizens living and working overseas. The foreign income exemption can save you a substantial amount on your South African tax bill.
Want to know more? Let’s break down the basics – what is the foreign income exemption? Who qualifies for it? How do you claim it? If these are the questions you’re asking, we’ve got answers.
What do overseas South African tax residents need to know about expat tax?
1. Residence-based taxation: South Africa has a residence-based tax system, which means you are taxed on your worldwide income, regardless of where you earn it. This means that even living and working abroad, you may still be liable to pay South African tax on your foreign income.
Read more: Clarifying resident vs. non-resident tax status for South African expats.
Who is a tax resident of South Africa? You are a tax resident of South Africa by default. As such, you will likely need to pay tax on your foreign income in South Africa unless you cease your South African tax residency and become a non-resident by tax emigration.
2. Foreign income exemption: The S10(1)(o)(ii) exemption allows you to exempt the first R1,250,000 of your foreign employment income from South African tax. To qualify for this tax exemption in South Africa, you must meet certain criteria, including spending more than 183 days outside of South Africa in a 12-month period and earning your income from employment as a South African tax resident.
Read more: What is exempt foreign employment income in South Africa?
3. Expat tax in South Africa: Any foreign employment income earned above the R1,250,000 exemption limit is subject to South African tax, which is known as “expat tax.”
4. Double Taxation Agreements (DTAs): South Africa has DTAs with many countries to prevent double taxation. These agreements can reduce your overall tax burden by allowing you to claim tax credits or deductions in one country for taxes paid in the other.
5. Tax filing obligations: Even living abroad, you must still file a South African tax return. Before applying for any relevant tax exemption, you must declare your worldwide income, including your foreign employment income. It will likely be worthwhile to appoint a tax representative in South Africa to streamline your tax filing obligations and ensure you’re making the most of the exemption.
What is the foreign income exemption in South Africa?
The foreign income exemption in South Africa allows South African residents who work abroad to apply to SARS and ask that a portion of their foreign employment income be exempt from South African tax. This is also known as the expat tax exemption in South Africa.
Read more: A comprehensive guide to the SARS foreign income tax exemption for South Africans working abroad.
What is exempt foreign employment income?
Exempt foreign employment income in South Africa refers to a portion of your foreign employment income not subject to South African tax. This exemption encourages South African residents to work abroad and contribute their skills and expertise to the global economy. At the same time, SARS gets its cut of the foreign employment income tax pie back home.
How do you use the s10(1)(o)(ii) exemption contained in the Income Tax Act on your tax return in South Africa?
- Show that you qualify to use it – meet the requirements:
– You must have spent more than 183 full days outside of South Africa during a 12-month period, including a continuous period of at least 60 full days.
– The income must be earned as an employee, not a self-employed individual.
– The income must be earned for services rendered outside of South Africa. - Complete your tax return:
– If you are an individual taxpayer, you must complete Form ITR12.
– You must complete the Foreign Income Declaration section of your tax return. This section asks for details about your foreign employment income, including the country of employment, income earned, and any foreign taxes paid.
– You will need to provide details about the number of days you spent outside of South Africa during the tax year.
– Your employer should provide you with an IRP5 that includes your foreign employment income details. - Claim the s10(1)(o)(ii) exemption:
– The first R1,250,000 of your foreign employment income is exempt from South African tax.
– Any income earned above the R1,250,000 exemption limit will be subject to South African tax. - Supporting documentation:
You should keep your foreign employment income records, including payslips, bank statements, and other relevant documents. SARS may require these documents to verify your claim for the exemption. - File your tax return: You must file your tax return by the due date, typically November each year.
Who can use the s10(1)(o)(ii) foreign employment income exemption?
The S10(1)(o)(ii) exemption is available only to South African tax residents who meet the following conditions:
- You must be employed by a company, either South African or foreign. Self-employed individuals or independent contractors are not eligible.
- You must spend more than 183 full days outside of South Africa during a 12-month period, including at least 60 full days continuously.
- The income you earn must be for services rendered outside of South Africa.
If you meet these conditions, you can claim an exemption on the first R1.25 million of your foreign employment income earned in a tax year, with the income above this threshold being taxed by SARS at your marginal rate.
Read more: South African working abroad? How to handle foreign income on SARS tax return.
FinGlobal: cross-border tax specialists for South African expats
Are you confused about your taxes while working abroad? FinGlobal simplifies international tax for South Africans. We help you understand your tax obligations, maximise tax benefits, ensure expat tax compliance, claim tax refunds, and resolve tax emigration.
Contact us today for a free consultation, or leave your contact details in the form below, and we’ll contact you to discuss how we can solve your tax challenges.