And the headaches when getting it wrong

By Amanda Visser

South African taxpayers who work abroad are entitled to claim a credit for the tax they have paid in the foreign jurisdiction. However, where they often get it wrong is how much they are allowed to claim.

Taxpayers are only allowed to claim the paid foreign taxes as a credit on the taxable income and not the full amount that they paid, warns Carmen Westermeyer, who facilitated a recent virtual discussion on persistent tax issues hosted by The Tax Faculty.

She gave a simple example where a South African tax resident earned R2,5 million while working offshore. He qualified for the foreign income tax exemption that is capped at R1,25 million.

The right way

In terms of the calculation for tax purposes the tax-exempt amount of R1,25 million should be deducted from the R2,5 million gross income, leaving the taxpayer with a taxable income of R1,25 million.

“Therefor, only half of the gross salary is taxable and therefore only half of the rebate can be claimed. The individual cannot automatically claim the full amount of foreign tax paid as a credit,” said Westermeyer.

If the taxpayer, by way of the example, paid tax of R500 000 in the foreign jurisdiction he is only entitled to claim a deduction on the taxable income and not the gross income when filing his South African tax return.

There are two tests that will apply, she explained. The first is that the amount of the rebate is equal to the amount of foreign tax paid on the amount included in taxable income; and the second is that the amount of the rebate that can be claimed can never exceed the South African tax payable on the amount included in taxable income.

The apportionment headache

Another issue that causes some confusion is the question of apportionment when foreign income is linked to South African earned income. Again, Westermeyer gave a simple example of an engineer who works on a building project in Africa, comes home and works on another project outside of SA. In other words, he is in and out of SA on a regular basis.

As a South African tax resident, the engineer will have to apportion the pay that he receives over the workdays that he worked abroad and the days he worked in SA.

However, if the individual has two separate employment contracts – one that purely relates to work done abroad and one that relates to work done in SA, there is no apportionment.

“I do find that you have to double check that you have proper proof by way of employment contracts to show that you have different employers and that you are not doing work for your foreign employer while in SA and the other way around.”

The general rule for global citizens is whether they are tax resident or not in a particular country. The reason why this is important is that if a South African becomes a non-resident taxpayer in SA his foreign income is irrelevant for South African tax purposes.

Tax resident or not

“The most common area where we see things go wrong is where people work abroad for a period of time and become non-resident in SA, but their salary is still being declared in SA. You need to check very carefully the point at which you become tax non-resident in SA,” says Westermeyer.

“Once you become non-resident your foreign income becomes entirely irrelevant from a South African perspective and you will only be taxed on your South African sourced income.” This includes rental, interest or other income from a South African source.

If someone has dual citizenship then the key distinguishing item will be which country – in terms of the tiebreaker rules in the Double Tax Agreement between SA and the other country – has the right to tax.