The change to section 10(1)(o)(ii) of the Income Tax Act has caused a lot of confusion for South Africans living and working abroad. Director of Sable International's South African tax division, William Louw, clarifies all uncertainty around the new South African 'expat tax', which came into effect on 1 March, setting out the changes and what they mean for you.
The South African Expat tax has been effective since 1 March which may be a relief to many people who are working overseas, but you're only exempt from being taxed on your foreign employment remuneration if it's less than R1,25 million ($65,000).
What has changed to the Income Tax Act?
South African tax residents who worked overseas for more than 183 days (of which 60 were consecutive) were exempt from paying income tax on their foreign employment earnings.
This has now changed. In 2019, this exemption was looked at in the Budget Review and South Africans living abroad now have to pay tax on anything above their first R1.25m made outside the country and still meet the 183 in aggregate and 60 consecutive days requirements.
Who is a tax resident?
Expats need to check their tax status, as the amendment specifically applies to South African tax residents - in simple terms, people working abroad, but who, in other respects, are still based in South Africa.
Expat tax exemption after 1 March 2020
If you are an employee providing your services outside South Africa on behalf of your employer, you may be eligible for the expat tax exemption.
The exemption is only available provided the specified qualifying periods are met and none of the exclusions applies and only the first R1,25 million of foreign employment remuneration earned will qualify.
If your employer is based in South Africa, they also need to split the income on the IRP5 to show what was earned while abroad compared to what was earned in South Africa.
The exemption does not apply to non-tax residents of South Africa. You must be working overseas for longer than 183 days in any 12-month period as well as a continuous period of 60 days, which must be spent outside South Africa in the same 12-month period.
Please note you could be working in South Africa on a passport and still meet the requirements if you are a South African tax resident.
Will I risk paying double tax?
In short, you won't pay double tax. The purpose of Double Tax Agreements (DTAs) between two countries is to eliminate double taxation. This is good news because it ensures that South Africans who earn more than R1,25 million working overseas will still only pay the additional tax that the South African Revenue Service (SARS) may charge. In other words, if you pay tax in the foreign country, that tax can be deducted off the South African tax due on your foreign remuneration.
South Africa holds DTAs with various countries to ensure that a taxpayer is not taxed by both South Africa and the country in which they're working. Where a taxpayer is registered as tax resident in both countries and there is a DTA in place, then the DTA will determine where and how a taxpayer must pay tax on income received.
People in the Middle East or in countries where there is no DTA are going to be most affected. Some countries in the Middle East have DTAs with South Africa, but the problem is that a lot of them don't have a tax revenue office, which means you cannot get a tax resident certificate to prove to SARS that you're a tax resident there.
Know your tax status
The law came into effect on 1 March 2020, but you still have several months to backdate your information and submit your return (or backdated tax status amendment) before the end of the tax year. If your tax status is incorrect at SARS, you need to make the change before the end of February 2021. If you fail to do this, SARS will come looking for you.
Financial emigration and your tax residence status
According to SARS, an individual's tax residence is not automatically changed when he or she financially emigrates. Financial emigration can be used in some cases to support your change of tax status.
Financial emigration requires the submission of a formal application to SARS and the South African Reserve Bank (SARB) advising them of your intention to financially emigrate.
Once your tax residency status has been changed to non-resident for tax purposes, you should not be taxed on your offshore income and only on your South African sourced income.
It's important to note that you will become liable for capital gains tax (CGT) on the day that you stop being a South African tax resident (this is known in South Africa as "exit tax"). In all cases, it is worth seeking the advice of a qualified tax practitioner with experience in this field to assist in determining the tax cost of your individual circumstances.
William Louw is director of Sable International's South African tax division.