South African tax residents who have been unable to return to their offshore assignments because of the international COVID-19 related travel restrictions may be in for a rather nasty tax surprise.

South Africans are taxed on their worldwide income but for a few exemptions, in particular, foreign employment income, says Cor Kraamwinkel, partner at Webber Wentzel.

South Africans working abroad had been fortunate that their entire foreign income was exempted from South African tax until March this year. Now, only the first R1,25 million is tax-free.

However, to qualify for this exemption, the South African tax resident (someone who lives in South Africa but predominantly works abroad) has to pass a physical presence test. To pass, the person must be outside South Africa’s borders for 183 days, of which 60 continuous, in any period of 12 successive months.

Those who were in South Africa when the lockdown started in March and have still not been able to leave have now been in the country for five months. “This scenario can dramatically alter a person’s South African tax liability,” says Kraamwinkel. There has been no indication that there will be any softening of the rules in terms of the physical presence test to cater for the COVID-19 lockdown. If tax residents fail the test, then their full income will be subject to tax in South Africa. Those who were under the impression that at least the first R1,25 million would have been tax-free will have a much bigger tax liability. It may even push them into a higher tax bracket.

The rules around foreign employment income remain hard-coded. The Draft Taxation Laws Amendment Bill has already been published and the time for comments has passed. The bill does not contain any proposed changes to the rules. “Unfortunately, there is no room for interpretation – you were either outside the country or not,” says Kraamwinkel.

If the tax authority in the host country has also deducted tax on the same income, the South African resident will be able to claim a credit for the tax already paid to avoid double taxation. This will reduce South African tax liability.

“It is unlikely that the government will make concessions on the tax payment. You will be in for the tax, but you can hope for reasonableness in so far as making arrangements for the payments.” The reality is that South Africa’s COVID-19-related relief has mostly been to defer the tax payment rather than to lessen the burden.

It is important to engage with the South African Revenue Service (SARS) and not to wait or not pay the tax, says Kraamwinkel. This may result in penalties and interest.

Government is in desperate need of tax revenue after having borrowed and spent billions to fund various COVID-19-related relief measures. “The news about large scale corruption associated with COVID-19 expenditure makes paying more tax in such circumstances an even more bitter pill to swallow.” It is difficult times and everyone is feeling the pain. However, very few citizens will have patience with the fact that they are going to pay more tax, ostensibly to fund large-scale corruption.

“The sentiment is really negative. Hopefully, the prosecution of those involved in corruption, as promised by Pres Cyril Ramaphosa, will make taxpayers feel slightly better,” says Kraamwinkel.