The amendment of Section 10(1)(o)(ii) of the Income Tax Act in 2020, which brought foreign employment income back into the South African tax net, has understandably caused confusion and anxiety among South African residents already living and working abroad, as well as for those still planning to seek foreign employment. Many fear their hard-earned income overseas will be subject to significant taxation in South Africa, potentially leading to a double tax burden.
This article aims to dispel these fears and clarify the complexities of South African tax on foreign income and the expat tax exemption. We’ll explore the eligibility criteria, the claiming process, and the potential reliefs available to ensure you understand your tax obligations and avoid unnecessary financial penalties.
Do you pay taxes in South Africa if you work overseas?
The short answer is: it depends. South Africa has a residence-based tax system, which means that if you’re considered a tax resident of South Africa, you’re generally taxed on your worldwide income, no matter where you earn it. This can feel daunting for expats.
Think of it this way: As a South African tax resident, you are expected to contribute to the country’s tax system, even if you are not physically present. This is because the South African Revenue Service (SARS) has the authority to treat you as a tax resident until you inform the tax authority that you no longer meet the requirements for tax residency and that your status should be updated to non-resident for tax purposes.
However, the good news is that specific exemptions and reliefs are available to help prevent double taxation on foreign employment income in South Africa. These can effectively reduce your tax obligation until you are eligible to terminate your tax relationship with SARS through tax emigration.
Long story short? Just because you work abroad doesn’t automatically mean you’ll face a hefty South African tax bill. Understanding your residency status and the available exemptions is vital to navigating the system effectively.
Read more: What happens when I do not declare foreign income if I have yet to cease SA tax residency?
South African tax on foreign earnings – resident vs non-resident
If you’re considered a South African tax resident (which you are, by default), you generally pay taxes on all your income and capital gains, no matter where you earned them. This means income earned while working abroad is also subject to South African tax.
How South African income tax on foreign earnings works:
- Progressive rates: The tax you pay increases as your income increases.
- Taxable income: Your taxable income is calculated by subtracting allowable deductions (like expenses related to earning your income) and tax-free amounts (like specific allowances) from your total income.
Read more: South African working abroad? How to handle foreign income on SARS tax return.
Non-residents are taxed differently: They primarily pay taxes on income earned within South Africa and on profits from selling property in South Africa. As such, the only legal way to minimise the risk of paying tax on your foreign employment income in South Africa is to become a non-resident for tax purposes by ceasing your tax residency with SARS.
Read more: Clarifying resident vs. non-resident tax status for South African expats.
What is the exemption of foreign income in South Africa?
The South African Income Tax Act allows for an exemption on income earned while working abroad under specific conditions. This foreign employment exemption helps limit double taxation. The exemption is limited to R1.25 million per year. Any income exceeding this amount is subject to South African tax – commonly called “expat tax”. Mechanisms such as tax credits and tax treaties are available to help offset taxes paid in other countries to provide further relief from double taxation. If the foreign country doesn’t tax however and your income is below R1,25m, no tax is payable.
What is exempt foreign employment income?
South African expats can enjoy tax relief on a portion of their income earned abroad. This expat tax exemption encourages South African residents to contribute their skills and experience to the global workforce while allowing the South African Revenue Service (SARS) to collect tax on a portion of their foreign earnings.
Read more: How much foreign income is tax-free in South Africa?
Who can use the foreign income tax exemption in South Africa?
South African tax residents who work abroad can apply to SARS to ask that a portion of their foreign employment income be exempt from South African tax, provided that they can show that they are eligible to do so. This means that the foreign income exemption is only available to South African tax residents who:
- Are employed by a company: This includes companies based in South Africa or other countries. Self-employed individuals and independent contractors are not eligible.
- Spend significant time abroad: You must spend more than 183 full days outside of South Africa within a 12-month period, with at least 60 of those days spent continuously outside the country.
- Earn income for work done overseas: The income must be generated from employment services performed outside of South Africa.
Can double taxation occur when working overseas?
Yes, double taxation is a reality in some situations. This is generally when:
- Your income exceeds the exemption limit: If you earn more than R1.25 million from your foreign employment, South Africa and the country where you work may have the right to tax that income.
- Double Tax Agreements: Even with a double tax agreement, both countries might still have the right to tax your income, especially if you work in the foreign country for more than 183 days.
How to avoid double taxation:
- Foreign tax credit (Section 6quat): South Africa provides a tax credit (Section 6quat) to offset taxes paid in other countries. This credit is claimed on your income tax return.
Interested in reading more about the foreign employment income tax exemption? Here’s what you need to know:
- What is the SARS foreign income exemption, and can you use it?
- A comprehensive guide to the SARS foreign income tax exemption for South Africans working abroad.
- Five frequently asked questions about the foreign income exemption.
- How do I declare foreign income on my tax return?
- Reducing taxes as a South African expat: what you need to know about cross-border tax planning.
FinGlobal: cross-border tax specialists for South Africans
Working abroad can make managing your tax obligations complex and stressful. At FinGlobal, we specialise in assisting South African expats with their South African tax compliance needs. Our services include:
- Ensuring compliance with South African tax regulations.
- Assisting with tax clearance applications and international transfers.
- Facilitating the process of claiming South African tax refunds.
- Guiding you through the tax emigration process when you’re ready to cut ties with the South African tax system formally.
Ready to simplify your international tax affairs? Contact FinGlobal today for a personalised consultation.
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