National Treasury has changed the provision in the tax law that exempts South African tax residents from paying tax on income from foreign employment. Currently, anyone who renders services outside of South Africa for more than 183 days in a 12-month period, including a continuous period of more than 60 days, is not taxed in South Africa.

Under the new provision, however, only R1 million of these foreign earnings will be exempted. Any income above that will be taxed in South Africa. This amendment comes into effect at the start of the next tax year on 1 March 2020.

To determine who will be impacted by the new provision, one must understand who is considered a tax resident in South Africa. The primary test for this is whether a person is ‘ordinarily resident’ in the country. ‘Ordinarily resident’ is, however, not a clearly defined concept. Each case will have to be judged on its own merits.

SARS has published an interpretation note mentioning several factors to be considered in determining if someone is ordinarily resident in South Africa. These factors include the following: those people’s nationality, their most ‘fixed and settled’ place of residence, where their assets are held and where they conduct business.

The interpretation note does not refer to financial emigration. You do not have to emigrate financially to change your tax residency, and approval from the South African Reserve Bank to financially emigrate does not automatically mean that you will no longer be considered a tax resident. Financial emigration may help to persuade SARS that you no longer see South Africa as your true or main home but it will not change your tax residency per se.

For someone who has lived and worked overseas for many years, it may be easy to show that they are not ordinarily resident in South Africa. All the factors showing that they have taken up a lifestyle in a foreign country – fixed employment, assets, investments, family there – would be compelling that South Africa is no longer their main home. The new proposal should not affect them.

That does not, however, mean that SARS would leave people who are not any longer ordinarily resident in South Africa alone; on the contrary, whenever people break tax residency in South Africa, they are deemed to have disposed of all their assets and that triggers a capital gains event. For capital gains tax purposes there is a deemed disposal of every single asset you own, local and foreign. The only exception is South African immovable property.

Related article: South Africans working abroad may in future face double taxation

Breaking tax residency

Breaking tax residency will create a headache for many people who left South Africa many years ago and never clarified their status with SARS. If they break tax residency now, they will have to pay capital gains tax on the deemed disposal of an asset base that they have built up over those years.

Anyone in this situation will therefore want to show that they broke tax residency many years ago when they had fewer assets. It may, however, be difficult to prove that they were indeed ordinarily resident somewhere else already that long ago, and they may also be liable for penalties and interest for non-disclosure of income earned from foreign dividends or foreign rental income to SARS.

It is not recommended that you sit this out and hope SARS won’t ever know that you are out there. Intelligence sharing with countries around the world makes it increasingly likely that SARS will identify South African tax residents who have been out of the country for many years. A voluntary disclosure will be far better to reduce liability than waiting for SARS to find you; the latter may even result in more severe penalties.

Not breaking tax residency

The new tax provision will not only affect people who break tax residency. It will also have major implications for the many South Africans who work in places around the world but maintain a home here. In most cases their families and assets are still in South Africa, and their intention is clearly to return.

These people can’t break tax residency and all their income from foreign employment will contribute to their gross income for tax purposes. They will have to declare their income – salary as well as fringe benefits, which covers things like accommodation and travel – in both countries, and any remuneration above R1 million will be taxed in South Africa.

Anyone who pays tax in a foreign country that has a Double Tax Agreement with SA will, however, be eligible for a rebate. They will not be exempted from paying tax in South Africa but the rebate will reduce their South African tax by the amount they have already paid in the foreign country.

The general rule is that SA tax residents are taxable on their worldwide income. Section 10(1)(o)(ii), however, provides a specific exemption for remuneration earned for services rendered outside SA if an employee spends more than 183 full days (including a continuous period of more than 60 full days) outside SA in any 12-month period during which those services are rendered outside SA. The purpose of this exemption is to provide relief to SA tax residents from paying tax both in SA and in the country where the services were performed as most foreign countries tax the employment income of foreigners in their country on a PAYE-type system.

Many individuals are, however, employed in countries where the employment income of foreigners are not subject to tax. These individuals would therefore pay no tax on that employment income – neither in SA nor in the foreign country where the services are rendered. This situation of double non-taxation is obviously unfair as it goes against the intention of the section 10(1)(o)(ii) exemption which was to prevent double taxation of the same income and not to provide double non-taxation of foreign income.

To end the situation of double non-taxation of foreign income, the section was amended in the Taxation Laws Amendment Act (No. 17 of 2017) with effect from 1 March 2020. Initially, the intention was to repeal section 10(1)(o)(ii) in totality. However, after impassioned representations by affected individuals to National Treasury, the proposal was revised to continue exemption of R1 million of foreign remuneration from South African tax if the individual meets the requirements of section 10(1)(o)(ii).

The effect is that for persons who are still considered tax residents of SA although they are performing services outside SA, the portion of their income exceeding R1 million will be included in their SA taxable income.

Practical implications for SA tax residents

1. An individual earning more than R1 million in a country where the employment income of foreigners is not subject to tax will most likely be taxed on this income in SA.
2. If an individual in foreign employment earns more than R1 million in a country where they have been paying a lower amount of tax on that remuneration than they would have in SA, they will likely be liable for the difference in tax in SA.
3. If an individual becomes liable for tax in SA after having paid the same or more employees’ tax in the country where the services were rendered, this might result in double taxation.
4. In situations where double taxation is possible because the individual is already paying tax in the country where the services are being performed, relief in terms of the foreign tax credit sections of the Income Tax Act or the application of a Double Taxation Agreement (DTA) are likely to be available.
5. If an individual is eligible for foreign tax credit or relief under a DTA, a directive would need to be obtained from the South African Revenue Service (SARS) to request relief from SA tax to the extent that a rebate in respect of the foreign taxes paid on that remuneration is available. In such cases, it is important that individuals seek advice on how to apply for these directives and to find out whether the application must be repeated annually.

The change only impacts individuals who are South African tax residents. Many South African nationals working abroad are already non-resident from a tax perspective and will not be affected. In such cases, the individual might have to provide evidence to SARS that he or she is not ordinarily resident in SA. This is easier to evidence when a person financially emigrated and indicate an intention to become an ordinarily resident of the foreign country.

South African nationals working abroad are encouraged to obtain professional advice on appropriate assessment of and planning for the impact that the new rules may have on their future tax liability. It is not a one-size-fits-all situation and specific advice on an individual’s personal situation is essential. Many South Africans might have already broken their SA tax residency and be in a better situation than they believe they are.

There is still time to prevent double taxation by making arrangements with SARS before March 2020. Please feel free to contact the Tax Consultant Fanus Jonck (tax@jonck.net) with your queries.