At the moment there is a tax exemption in place for South Africans: If you are out of the country for 183 days or more with at least one trip of 60 consecutive days (not applicable for crews of ships), then foreign income earned while outside of South Africa is exempt from tax in South Africa. This is in terms of Section 10(1)(o)(ii) of the Income Tax Act, 1962 (Act No. 58 of 1962). This exemption is still in place, but the South African Revenue Service (SARS) has indicated that from 1 March 2020 this exemption will only apply up to a maximum of R1 million in earnings. This is the only change: A cap was introduced on this exemption.

Therefore, if you work abroad and earn R100 000 per month (R1,2 million per year) the maximum amount that would potentially become taxable is R200 000. There are however a number of other tests and/or factors to take into account.

Tax residency test

The test for tax residency is that any individual who is ordinarily resident (defined in common law) in South Africa during the year of assessment or, failing which, meets all the requirements of the physical presence test will be regarded as tax resident. A person is regarded as being ordinarily resident in the county where his or her primary home is and driven by intention, employment, location of personal belongings and where their family is situated. If ordinary residency cannot be determined, the physical presence test is a 5-year test of how much time you spend within South Africa. Having South African citizenship, a South African ID book or South African passport does not by default make you a South African tax resident.

For example, if you have sold your house in South Africa and you and the family have moved to New Zealand, you rent or own a house in New Zealand, your kids go to school in New Zealand and you are working there, then it is more than likely you are not a tax resident of South Africa. The new amendment therefore will be of no significance to you, as SARS can only tax non-residents on what they earn from a source within South Africa. You therefore don’t need to financially emigrate to not pay tax.

Double tax agreement protection

South Africa has about 60 double tax agreements (DTAs) with different countries. Most of these agreements were based on the same model, applying the rule that the country in which the taxpayer worked for 183 days or more per year would normally be the country with the rights to tax the employment income. Therefore, if you work outside of South Africa – in a country that South Africa has a DTA with – for more than 183 days, then your employment income is not taxable in South Africa because of this DTA protection.

For example: Mrs Jordaan and her husband go work in Germany for 18 months. They keep their house in South Africa and are in Germany temporarily, with the intention of returning to South Africa and are therefore tax residents of South Africa. In terms of Section 13 of the DTA we have with Germany and because they are there for more than 183 days, the income is only taxable in Germany. They don’t have any tax due in South Africa and the change will not affect them.

Foreign tax credits

Any foreign tax you pay would also be credited against your South African tax. For example: During the 2020/2021 tax year you work in France for 4 months, where you earn R800 000 and 15% tax is deducted. You then go work in Belgium for 6 months, where you earn another R800 000 and 20% tax is deducted. Your total foreign income would be R1,6 million and you would have paid R280 000 in tax. Because you are tax resident, your foreign income above R1 million will become taxable and therefore R600 000 of your earnings become taxable. The tax due in South Africa would be ± R179 000. You have already paid R280 000 in tax, so there would be no further tax due.

Who will be affected?

The new amendment will affect the following persons:

1. A South African tax resident working temporarily abroad and who earns more than R1 million while working in a country which does not have a DTA with South Africa and does not have enough tax deducted; and
2. A South African tax resident working temporarily abroad, earning more than R1 million and working in several countries (not more than 183 days in any of them) and not having enough foreign tax deducted.

If you are uncertain about whether you are tax resident or whether you have DTA protection, or how this change from 1 March 2020 may affect you, you can ask Fanus Jonck (tax@jonck.net).