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Taxing of income earned from foreign employment

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As more and more South Africans are exploring employment opportunities beyond our country’s borders, the issue of paying tax to the South African Revenue Service (‘SARS’) on earnings from foreign employment becomes increasingly relevant. In this article we will examine what the current income tax legislation stipulates, how this is likely to change in the near future and what proactive steps expats can take to prepare their affairs.
Residence

South Africa has a “residence” basis of tax, which means that South African residents are taxed on their worldwide income, regardless of the source of that income. A natural person is considered a “resident” in terms of the Income Tax Act if:

  1. The person is ordinarily resident in South Africa (this is his or her true home); or
  2. The person is considered physically present, which means he or she is not ordinarily resident, but has spent at least a certain number of days in the Republic, being:
    • More than 91 days in total in each of the current and previous five tax years; and
    • More than 915 days in total during the previous five tax years.

Income earned by residents on foreign employment

Income earned by “residents” from employment outside South Africa is subject to tax in South Africa, with the exception of remuneration to the following persons:

  1. Any officer or crew member of a ship engaged in the international transportation of passengers or goods or is engaged in prospecting, if the person is outside the Republic for more than 183 days (in total) during the relevant year of assessment;
  2. Any person in respect of services rendered outside the Republic for or on behalf of any employer if the person was outside the Republic for more than 183 full days (in total) during any 12-month period and for a continuous period of more than 60 full days during that 12-month period.
  3. For years of assessment commencing on or after 1 April 2014, any officer or crew member of a South African ship (i.e. a ship registered in South Africa in accordance with section 15 of the Ship Registration Act) mainly engaged in one of the following:
    • Fishing outside the Republic; or
    • International shipping (i.e. transporting passengers or goods, for a consideration, where the business of the ship is mainly international travel).

Proposed amendment to the Income Tax Act

For the majority of South Africans seeking international employment opportunities (other than aboard a ship), an exemption is only available through staying outside the Republic for at least 183 days per 12-month period, ensuring that at least 60 of those days are consecutive (point ii above). However, earlier this year Treasury proposed an amendment to the Income Tax Act that would do away with this exemption from 1 March 2019 onwards. That would mean that the majority of expats (those not employed on a ship) would only be eligible for a tax credit to the extent that tax was paid offshore. Such amendment would have significant consequences for South Africans working in tax havens abroad. As a result, the proposed amendment was met with widespread concern from institutions and individuals.

This month saw Treasury softening its stance on expat tax when it confirmed in Parliament that the proposed amendment would be changed to allow the first R1 million of income earned on foreign employment to be exempt from tax in South Africa. The implementation date of the proposed amendment was also postponed by a year to 1 March 2020.

Preparation and setting affairs in order

Residents earning less than R1 million from foreign employment are unaffected by the proposed amendment.

Residents earning in excess of R1 million from foreign employment have until 1 March 2020 to set their affairs in order. Considerations would include:

  • Formally emigrating (so they are no longer ordinary resident);
  • Planning ahead to change their tax status (those not ordinarily resident but considered physically present);
  • Implications of double tax agreements that may exist with the relevant foreign country; and
  • Impact of delays experienced in practice in claiming tax credits for foreign tax paid (which in some instances can lead to effective double taxation).

Employers sending employees to foreign countries may need to look into the remuneration structure to ensure employees are not worse off, and to accurately assess the cost of such international assignments as a result.

It is highly recommended that the available options be discussed with a qualified tax practitioner to properly assess the implications thereof. For example, formally emigrating would also lead to a deemed disposal of all property held by the resident for capital gains tax purposes.

Effective planning is the key to successfully and legally reducing your tax liability, especially in anticipation of new legislation. At Meredith Harington, we go beyond mere tax compliance and proactively recommend tax saving strategies to maximise your wealth. By regularly keeping up to date with legislation, we make it our mission to give you the benefit of current and solutions-based advice. If you would like to discuss or review your tax planning strategy, then give us a call.

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