Many South African expatriates, i.e. South Africans living and working abroad, or planning to will presumably be anxious to know whether the “expatriate tax” which refers to the amended section 10(1)(o) of the Income Tax Act, will apply to them when it comes into effect from 1 March 2020 and in respect of years of assessment commencing on or after that date.
The amended section provides that foreign employment income earned by a tax resident of South Africa will no longer be fully exempt as the exemption provided under section 10(1)(o)(ii) will from 1 March 2020 be limited to R1 million. Any remuneration earned over and above R1 million will be subject to normal tax in South Africa, with the normal tax rates applying for the particular year of assessment.
The type of remuneration that is contemplated in this section would include salary, leave pay, overtime pay, bonus, commission, fees, travel and/or subsistence allowances but excludes fees earned for working as an independent contractor abroad and other amounts, for example, amounts paid by way of pension, retirement allowances etc.
Should a South African expatriate earn remuneration whilst working abroad that exceeds R1 million, that person may be subject to tax in South African and in the country in which he/she renders the services. However, SARS has, in terms of the Interpretation Note 16 (issue 3) published on this section, acknowledged that a double tax situation may arise in this instance and have confirmed that South Africa will provide double tax relief under section 6quat of the ITA which must be claimed by a taxpayer when he/she submits their income tax return.
The key elements that are required for the exemption under section 10(1)(o)(ii) to apply is that the person working abroad, i.e. an expatriate, must qualify as a tax resident of South Africa and as an” employee” (as defined in the ITA who is receiving “remuneration” from an “employer” (which includes non-resident employers). Furthermore, the employee must have rendered services outside the Republic for:
- a period or periods exceeding 183 full days in aggregate during any period of 12 months; and
- for a continuous period exceeding 60 full days during that period of 12 months, and
- those services were rendered during that period or periods
Do I qualify as a tax resident of South Africa?
There are two mechanisms whereby tax residency of a taxpayer is triggered, either by being an “ordinary resident” or by meeting the physical presence test. According to SARS (in terms of Interpretation Note 3), the enquiry into whether a natural person is “resident” in South Africa for income tax purposes commences with determining whether that person is “ordinarily resident” in the Republic since the physical presence test does not apply if a natural person is ordinarily resident in the Republic
The question of whether a natural person is ordinarily resident in a country is one of fact. Each case must be decided on its own merits, taking into consideration principles established by case law. When assessing whether a natural person is ordinarily resident in the Republic, a list of factors would be taken into consideration, for example, a person’s intention, most fixed and settled place of residence, the place where that person stays most often, location of family, periods spent abroad, employment and economic factors etc.
Note that should a taxpayer qualify as a tax resident in terms of the ordinary resident test or under the physical presence test, there may be an override test which determines that a person would be non-resident should he/she be deemed to be exclusively resident of another country under a Double Tax Agreement (“DTA”) concluded between South Africa and that other country. Thus, it would be important to consider the “Residence” article (Article 4) in the DTA when determining your tax residency status.
South Africans who have emigrated and reside in a foreign jurisdiction with no intention of coming back to South Africa would not be subject to the expatriate tax in South Africa as they would most likely not qualify as South African tax residents. They would, however, be subject to tax in the foreign country they reside in (unless it is a tax haven).
What kind of proof would convince SARS of my intention to emigrate?
Where a person who intends to emigrate or has already emigrated has completed a valid financial emigration process via their bank with the South African Reserve Bank and with SARS, including having paid the “exit tax”, i.e. capital gains tax on deemed disposal of assets ( if applicable) would provide near conclusive indicators that the person is not ordinarily resident in South Africa. Therefore, if a taxpayer genuinely has the intention of leaving South Africa permanently, they should conduct these processes before they leave to ensure they are not subject to the expatriate tax from 1 March 2020.
Themis Commercial Legal Advisors (Pty) Ltd