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S.Africa: The “Expat Tax” and Financial Emigration

  • 29 April 2019

In the wake of another budget deficit, SARS looks toward South Africans living abroad to help close the gap.

A recent amendment to section 10(1)(o)(ii) of the South African Income Tax Act No.58 of 1962 (‘the Act’), as part of the Taxation Laws Amendment Bill of 2017, has attracted tremendous international attention by South Africans living abroad due to its proposed tax consequences. It must be stressed at the outset that the amendment to section 10(1)(o)(ii) only affects South African tax residents.

The amendment, which has now become known as the “expat tax” or “#Tax2020” on social media and other news platforms, has sparked controversy and confusion by South Africans living and/or working abroad (“expats”) as to the exact tax consequences and methods of remediation available to these South African taxpayers.

It is common cause that all South African tax residents must file a tax return disclosing their worldwide income (local and foreign).

Expats have, however, enjoyed an exemption of foreign income in accordance with section 10(1)(o)(ii). The section provides that foreign income earned in respect of services rendered outside of the Republic of South Africa will be exempt from South African income tax, provided they meet the following requirements:

  • The resident, as an ‘employee’, receives foreign income in exchange for services rendered outside the Republic of South Africa for an employer;
  • The resident renders the services for a period or periods exceeding 183 full days in aggregate outside the Republic of South Africa during any period of 12 months; and
  • The resident is outside of the Republic of South Africa for a continuous period exceeding 60 full days in that 12-month period.

The recent amendment, however, has effectively ‘capped’ the foreign income exemption to R1 million and restricts the exemption to foreign remuneration earned and not all foreign income, as previously stated. This entails that all remuneration received from a foreign source by reason of employment above R1 million will be included in the taxable income of the resident. The resident will, as per usual, then be taxed in accordance with the progressive tax table after the R1 million exemption has been taken into account.

‘Remuneration’ is defined in the Fourth Schedule and includes, amongst other, any amount of income received by way of salary, leave pay, bonus, commission, pension, overtime pay, gratuity or fees.

A ‘year of assessment’ is not a calendar year but refers to the period 1 March – 28 February each year, which is the period SARS assesses an individual’s tax liability.

Despite the consistent and strong advocacies by expats and tax experts in South Africa against the implementation of this limitation, National Treasury tabled the Taxation Laws Amendment Act to parliament and the Income Tax Act has subsequently been amended to include the limitation.

The effective date of this amendment is 1 March 2020 (i.e. 2021 tax year). National Treasury has made it clear that policy changes will not be discussed further, but cedes that certain practical matters will need refinement.

What must I consider as an expat in my tax calculation?

There are various matters to consider when calculating the tax liability of an expat individual, such as:

  • Is the expat a resident for purposes of the Act or a non-resident (to be discussed further on in this article)?
  • Does the foreign employer currently withhold foreign taxes on his/her remuneration or foreign income earned in the foreign jurisdiction?
  • Does the foreign jurisdiction, in which the South African expat has his/her employment and delivers his/her services, have a Double Tax Agreement (“DTA”) with the Republic of South Africa and does this DTA contain a ‘tie-breaker rule’ for employment income and residency status?
  • Does the DTA provide for tax credits or other forms of relief in the case of double taxation?
  • Can the South African expat claim tax rebates or credits in his/her tax assessment as a result of foreign taxes paid?
  • Does the expat earn income from other jurisdictions?
  • Does the expat earn income from South Africa, while working/living abroad?
  • Has the expat ceased to be South African tax resident by virtue of a DTA?

The questions listed above are some of the key considerations when assessing the tax liability of a South African individual who either lives or works abroad, or both.

Another concern, possibly larger than the new amendment, is that South Africans living abroad, who have remained a ‘resident’ for tax purposes, are under a false pretence, where they believe there was no need to file tax returns to the South African Revenue Service (SARS) in years that they neither lived nor worked in South Africa. Accordingly, the individual is not tax compliant.

A very important consideration, often overlooked, is the tax consequences of ceasing to be a South African tax resident. In terms of Section 9H of the Act, ceasing to be a tax resident triggers deemed disposal rules. This means capital gains tax is triggered on worldwide assets except fixed property in South Africa. This can be a material tax charge.

What about Financial Emigration?

The amendment has led to several expats initiating the process of Financial Emigration (FE), with the South African Reserve Bank (SARB) as a method of remediation to the taxation amendment. FE is a financial status change with the SARB and is initiated at the election of the South African exchange control resident. As part of FE, an application is made to SARS resulting in a tax emigration certificate being issued. This merely confirms that the tax affairs of the applicant are in order with SARS.

It must be noted, however, that the residency status, as reflected by SARB, does not influence the tax residency status for purposes of the SARS. Accordingly, the FE process has possibly been entered into without due cause, depending on the facts and circumstances of the individual. These individuals, in most instances, are actually intent to ‘tax emigrate’ (i.e. become a non-resident for SARS purposes) to ensure their tax liability is calculated accurately and in accordance with their residency status.

Most expats, it would seem, did not apply to FE when leaving the Republic of South Africa on their initial overseas trip, even though this trip in some instances, turned out to be a permanent move to the foreign country. This is one of the origins of a larger problem, leading to the confusion currently being experienced by South African expats. In a large number of cases, due to the duration that they have been abroad, these expats are now non-resident for tax purposes, but are still resident for exchange control purposes.

Get Advice before Making a Decision

The process of Financial Emigration is complex and each situation is unique. It is therefore paramount that expats consult a professional who can carefully consider the facts and circumstances of the expat.
As outlined briefly in this article, there are a number of areas to consider and FE may not be the best option for everyone.

If you believe the changes to section 10(1)(o)(ii) may affect you or you require additional information about FE, please contact your local Moore Stephens Office.