South African personal income tax – common tax errors expats make

You’ve taken the plunge and headed overseas. New horizons, new adventures, it’s all incredibly exciting. But even with all that positive change, there’s that minor niggle in the back of your mind: taxes. Specifically, make sure you’re on the right side of the South African Revenue Service (SARS) while coming to grips with a new tax system in your new home as a South African now working abroad.

Don’t worry; you’re not alone! Personal income tax in South Africa as a new expat can be confusing. So, let’s look at some of the most common tax mistakes South African expats make and how you can sidestep them, leaving you free to enjoy your adventure with a clear head and a proper understanding of the tax implications of working overseas.

Figuring out how the concept of South African tax residency applies to you

One of the significant causes of expat tax issues is a misunderstanding of what tax residency means and how it works once you’ve left South Africa. Unlike many countries, South Africa runs a residence-based system of taxation. Your worldwide income is subject to South African taxation, even if earned elsewhere. This is where many expats stumble.

It would be a mistake to assume you’re no longer a South African tax resident just because you’ve emigrated. Many expats believe that simply leaving South Africa automatically terminates their tax residency. This is not the case. SARS considers you a tax resident in a residence-based taxation system if you meet one of two tax residency tests.

• The physical presence test is straightforward and assesses the number of days spent in South Africa during a tax year.
• The ordinary residence test is more complex and considers factors such as your family connections, asset location and where your social interests lie.

Read more: Breaking tax residency with SA: when to apply the physical presence or ordinary residence test.

Failing to understand these tests can lead to the mistaken belief that you are a non-resident for tax purposes, which could result in undeclared foreign income and potential penalties.

Read more: Hot question: do you pay tax in South Africa if you live abroad?

The importance of formally ceasing your tax residency with SARS

Even if you no longer meet the requirements for tax residency, this alone is not enough to terminate your tax obligation in a residence-based taxation system. You must formally notify SARS of your tax residency status change and ask them to approve it. This process is known as tax emigration, and you will need to provide evidence to support your claim that you have no intention to return to South Africa to wrap up your tax affairs. Until you cease your tax residency in this way, SARS is entitled to treat you as a tax resident.

Understanding how tax residents are taxed on foreign income

Once you’ve determined your tax residency status, you must understand how SARS taxes foreign income.

Tax for South Africans working abroad – the obligation to declare worldwide income to SARS

There are still expats who mistakenly believe that income earned abroad is beyond the reach of SARS. This is no longer true. Given the digital nature of our lives and extensive information-sharing agreements with financial institutions in numerous countries, it’s safe to say that SARS has eyes everywhere, and there is no hiding from the taxman.

Failure to declare foreign income can lead to severe penalties, including interest charges and potential prosecution. This obligation to declare foreign earnings in a residence-based taxation system includes income from employment, investments, and business activities abroad. This is known as expat tax and has the potential to land you in a double taxation pickle, which is usually where Double Tax Agreements come into play with SARS.

Read more: South African working abroad? How to handle foreign income on SARS tax return.

Understanding how to use the foreign income exemptions correctly

Having just dropped the double taxation bomb, it’s time to discuss tax mitigation. One of the top ways to pay less tax in South Africa is to get to know the SARS foreign employment income exemption – it can be a real lifesaver when you get it right, but it’s also easy to get tripped up by the rules.

With the foreign employment income exemption, SARS gives you a tax break for certain income you earn while working abroad. Sounds great, doesn’t it? But, and this is a big but, there are strict rules. You’ve probably heard of section 10(1)(o)(ii) of the Income Tax Act – that’s the one that deals with income earned while rendering services outside South Africa. It’s all about how many days you’re out of the country and what kind of work you’re doing.

Now, where things often go sideways is with understanding and applying these rules. People either get it completely wrong and end up paying too much tax, or they go the other way and think they don’t have to tell SARS about that income. Neither is a good place to be in a residence-based taxation system.

Here’s a breakdown of what can trip you up with the foreign employment income exemption:

1. Misinterpreting the “days outside South Africa” requirement:
   – Miscalculate the number of qualifying days, including days that don’t count or excluding days that do.
   – Not keeping accurate records of your travel dates makes it impossible to prove you meet the requirements.
2. Misunderstanding the “nature of services” criteria:
   – Assuming that any work done abroad qualifies, when SARS has specific definitions of what constitutes “rendering services.” Your contract might not detail the nature of your services, making it challenging to prove eligibility.
3. Assuming automatic application:
   – Thinking the exemption applies automatically without needing to declare the income to SARS is a big mistake. All income still needs to be declared.
   – You might not realise that you must provide supporting documents when claiming the exemption.
4. Incorrect application of the exemption:
   – You might apply the exemption to income that does not qualify, resulting in penalties and interest.
   – Failing to understand the full scope of the exemption means you don’t claim the full extent of what you’re entitled to.
5. Lack of proper documentation:
   – Failing to keep accurate records of travel dates, contracts, and payslips.
   – When requested by SARS, you were not able to provide proof of your foreign employment or proof of having paid foreign tax on your income.

To avoid SARS, you must be meticulous. Keep those travel records, get your contracts in order, and if you’re unsure, seek professional advice. It will save you a lot of stress in the long run.

Read more:

• South African working abroad? How to handle foreign income on SARS tax return.
• What is the SARS foreign income exemption, and can you use it?

Making proper use of Double Taxation Agreements (DTAs)

Let’s break down Double Taxation Agreements (DTAs) in a way that’s easy to grasp. Think of them as a “tax truce” between South Africa and other countries. They’re designed to stop you from paying tax twice on the same money, once in South Africa and again where you live. They decide which country gets to tax what income. But, as with anything tax-related, things can get tangled when applying the rules.

• What DTAs do for you:
• They prevent you from paying double tax.
• They clarify which country gets to tax your income.

Where expats go wrong in using double tax agreements in South Africa:

1. Getting the rules mixed up: Each DTA with South Africa is different, like different sets of rules for different games. People often assume they all work the same, which leads to mistakes.
2. Missing out on tax breaks: Even if you know DTAs exist, you might not know you have to ask for the tax breaks. This means you could pay more tax than you need to.
3. Assuming it happens automatically: Many expats believe that the DTA automatically applies. This is not true; you need to claim the benefits.
4. Not understanding residency rules: There are rules within the DTA that specify how to determine where you are a resident for tax purposes.

How to avoid making these tax mistakes as an expat:

• Do your homework: Read the DTA between South Africa and your country.
• Ask for help: A tax expert can explain the rules.
• Keep records: Proof of tax paid elsewhere is essential.
• Stay updated: Tax law changes.

Handling the SARS refund claims process incorrectly.

Claiming tax refunds from SARS can be complex, especially when dealing with foreign bank accounts or non-resident status. Expats often make mistakes in their tax refund applications, leading to delays or rejections. To avoid this, keeping accurate records of tax payments and related financial documentation is essential to streamline the SARS tax refund process.

FinGlobal: tax specialists for South African expats

So, there you have it. Dealing with South African taxes while living abroad doesn’t have to be a headache. It boils down to knowing the rules, keeping good records, and not being afraid to ask for help. By being aware of the common mistakes expats make, you can avoid those nasty surprises and keep your tax affairs in order, freeing you up to enjoy your new overseas chapter.

But if all this talk of South African tax residency, double tax agreements, and foreign income exemptions is making your head spin, don’t worry. That’s where FinGlobal comes in. Whether you’re looking to claim a tax refund, need help with expat tax compliance, or are thinking about becoming a non-resident for tax purposes via tax emigration, our team has the expertise to guide you through every process, ensuring the best possible outcome.

Contact FinGlobal today to avoid expat tax mistakes and streamline your tax obligations in South Africa.