By Amanda Visser

South Africans living and working abroad have about six months left to deal efficiently with the fundamental change in the way their foreign income will be taxed in future. The foreign income exemption – Section 10(1)(o)(ii) of the Income Tax Act – will then be capped at R1 million and all foreign income exceeding this amount will be taxed according to the individual’s normal tax rate up to 45%.

Many South Africans are still unsure how the South African Revenue Service (SARS) will administer this change, how it will affect them and what they need to do, says Jonty Leon, expatriate tax legal manager at Tax Consulting SA. Employers have also contemplated the impact of the law change on them and realised that they will likely have to bear the additional tax cost that would be imposed on South African expatriates. ‘This could have dire consequences for South Africans as a more cost-effective solution may be to repatriate South African employees and to replace them with an expatriate from a less punitive tax jurisdiction,’ says Leon.

Since the change was introduced, there has been a lot of uncertainty and even misinformation in the market about ways to mitigate the impact. Last week, SARS issued a statement and a list of frequently asked questions to assist employees, employers and the public. The aim with the list is to offer clarity and to ensure consistency of certain practical and technical aspects relating to the amendment, SARS said in a statement.

One of the issues that has been at the heart of a lot of the confusion relates to formal immigration and the effect of that on tax residence. SARS stated clearly in the FAQs document that approval from the South African Reserve Bank (SARB) to emigrate from a financial perspective is not connected to an individual’s tax residence. ‘Financial (formal) emigration is merely one factor that may be considered to determine whether or not an individual broke his tax residence.’ An individual’s tax residence is not automatically broken when he financially emigrates. The deciding factor remains whether or not an individual ceased to be ‘ordinarily resident’ in South Africa.

Hugo van Zyl, deputy chair of the South African Institute of Tax Professionals’ personal tax work group, says leaving the country and notifying SARS is not adequate. To be deemed non-resident for tax purposes, the individual will be subjected to the ordinarily resident and the physical presence tests on an annual basis. It is, however, possible to be deemed a resident of another country in terms of a double tax agreement between SA and the other country. If a person is then considered a non-resident for tax purposes, any income earned in a foreign jurisdiction will not be subjected to South African tax.

Several role players in the tax industry have caused confusion by suggesting that formal emigration is a sure way out of being taxed on foreign income. Elzahne Henn, tax director at Mazars, says a correctly followed financial emigration process is an objective factor that may be ‘indicative’ of a person’s intention to break tax residency in South Africa. She says it is definitely not conclusive that a person has broken tax residency. ‘A correctly followed financial emigration will in our view not absolutely discharge a taxpayer’s onus of proof against SARS to evidence non-residency for tax purposes’, she warns. One’s status as non-resident for tax purposes is not determined by a single fact, but rather a balance of circumstances. ‘SARS may challenge a person’s intention to emigrate financially if other objective factors suggest that South Africa is still his main or principal place of residence.’

Tax experts have also cautioned against making rash decisions in terms of formal emigration or becoming a non-resident for tax purposes as it triggers capital gains tax on the ‘deemed disposal’ of the individual’s worldwide assets at the time of becoming a non-resident. This can be an extremely expensive exercise.