New tax implications for South Africans working abroad – taxed if over R1m p.a.

In broad terms South Africans are generally currently exempt from South African Income Tax if they spend more than 183 full days outside of South Africa during the tax year. More of that below. if you are classified as a South African resident you will be liable for tax on your overseas income.

However in terms of proposed changes the termination of this approach will be somewhat weakened by:

1. the inclusion of a R1 million per year exemption; and
2. the possible further reduction if a double tax agreement applies.

The expected start date is 1 March 2020. In other words only the first one million Rand earned by a person who meets the criteria for exemption, will actually be exempt from income tax. All income earned above the initial R1m will be taxed at the normal rates applicable to individuals. The individual may also be entitled to a reduction, or in practise a refund of their SA income tax actually paid, by offsetting all or part of foreign tax which they may pay on the income. This could take place if they paid tax on the income to a country whic his a party to a so called double tax treaty with South Africa.

Example – take a typical super yacht skipper from South Africa. He or she will be earning a minimum of say US$200,000 per year, equating ZAR3m at current rates. If the exemption applies, and is limited to R1m per year, then R2m of taxable income arises. Typically this will have not have been taxed anywhere, so SA personal tax of approximately R745,000 would arise leaving R 1,255,000 take home pay aftertax. A nasty shock indeed .

SA residents may exit the SA tax net by formally emigrating or ceasing to be tax resident. However there may be Capital Gains Tax implications. Under such circumstances the SA tax payer will be deemed to have sold all of their assets, with the exception of immovable property situated in South Africa, at market value on the date they ceased to be a resident and will accordingly be liable for pay the resultant tax applicable to the capital gain on those assets.

Carefully consider and take professional advice to guide your decisions regarding taxation – income tax, capital gain tax, tax in the countries where you maybe working as early as possible. Tax should not drive your overall decision making, but its best to get it under control, rather than find taxation becomes a nasty surprise and SARS demands it share of off-shore earnings.

Although some overseas income may be exempt in terms of the Income Tax Act, it must be remembered that a person will be treated as a resident for tax purposes if they are either ordinarily resident in South Africa, or if they meet the criteria of the physical presence test. A person will be an SA resident for tax purposes when they meet all of the following criteria regarding the number of days spent in South Africa:

91 days in total during the current year of assessment; and

91 days in total during each of the previous five years of assessment; and

915 or more days during the previous five years of assessment

When is income exempt from South African tax?

Foreign income earned by a tax resident will be exempt from South African tax if the person works as a crew member or officer of a ship which is engaged in the transport of passengers overseas, or in the prospecting, exploration or mining for any minerals from the seabed outside of South Africa. This exemption will only apply if the person was outside of SA for a total of more than 183 full days during the tax year.

In addition, any salary earned by a South African for services rendered outside of SA on behalf of an employer will be exempt – if that person was outside of SA for more than 183 full days (including a continuous period of 60 days) during any 12-month period that started or ended during the year of assessment. This exemption does not apply to income made through contracting, which would be fully taxable.

Treasury has been debating this exemption since 2017 with the initial aim being to repeal it fully. The main reason provided for this proposed amendment was to curb situations of double non-taxation of foreign income such as when an individual’s employment income was not being taxed in either SA or the foreign country.

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