Expats working abroad are concerned by the proposals laid out by Treasury in 2017 on how such taxpayers should be taxed. The historical and current (2019) position is that South Africans who work abroad and meet the requirements of S10(1)(o)(ii) of the Income Tax Act are exempt from paying tax in SA on income earned while working outside of SA.
In a nutshell, this section exempts any taxpayer who has spent at least 183 days of a consecutive 12-month period outside of SA in order to render services to their employer and at least 60 of the 183 days are continuous (unbroken). It is important to note that the exemption does not apply to all employment income, but only to the employment income earned while working outside of SA.
The advantage for taxpayers historically and currently of S10(1)(o)(ii) is that South Africans working overseas in low or zero tax jurisdictions have had little or no tax to pay. While it has always been a requirement that such income be declared on the taxpayer’s income tax return in SA, it has always been exempt from income tax.
This will all change next year. From 1 March 2020, South African residents who spend more than 183 days working outside the country will be subject to South African tax on foreign employment income which exceeds R1m. Let’s look at an example of how the proposed amendments will affect a taxpayer before and after 1 March 2020:
Assume that Bob is a South African citizen and taxpayer who normally works in SA but is seconded to Iceland for 12 months to work on a contract for his employer. His annual salary of R1,700,000 received in SA will remain the same during the time that he works in Iceland. Assume that the tax rate in Iceland is a flat 5% and in SA a flat 40% for the purposes of this example.
|Before 1 March 2020||After 1 March 2020|
|Salary earned while working in Iceland||R1,700,000||R1,700,000|
|Tax paid in SA (40%) on amount exceeding R1m||–||R280,000|
|Tax paid in Iceland (5%) *||R85,000||(R85,000)|
|Net Tax Outflow||R85,000||R195,000|
* Claimed in SA after 1 March 2020.
As can be seen, the proposed amendments will clearly remove the benefit Bob received previously of having to only pay tax at 5%. It is worthwhile noting the following:
- The proposed amendments only apply to income earned which exceeds R1m i.e. if Bob had earned less than R1m then it is anticipated that the proposed amendments will not apply to him at all (we have to wait and see what amendments Treasury will implement after 1 March 2020).
- SA citizens who are living overseas and have not formally financially emigrated are viewed by SARS as SA tax residents and the proposed changes to S10(1)(o)(ii) will also apply to them. For example, individuals who left SA to work abroad and who plan to return to SA at some point in the future still remain residents in SA for tax purposes. Such individuals have always been exempted from paying tax in SA on the income they earned abroad by virtue of the existing legislation. However, the proposed amendments will now see such people becoming liable for paying tax in SA on the income they earn outside of SA. They will, of course, be able to offset any foreign tax paid overseas against tax due to SARS in SA, but, will no longer benefit from lower tax rates in countries outside of SA.
- SA taxpayers who financially emigrate (by formally informing the Reserve Bank and SARS) are not viewed as residents for tax purposes in SA and are therefore unaffected by the above. Such taxpayers are treated like all foreigners, not having to declare or pay tax on anything in SA apart from revenue earned from a SA source e.g. rental income earned on a property owned in SA.
The above lays out the direction SA is heading in simplistic terms and does not take into account all the factors which may affect expats. However, if you are an individual affected in any way by the above, we strongly recommend that you contact a Tax Shop Near You for assistance.