Real Estate Investor Magazine South Africa July/August 2019 | Page 57

S
ome South African tax residents working abroad,
often referred to as "expats", are grumbling about
changes to the Income Tax Act, 1962 (the Act) which
comes into effect on 1 March 2020.
Expats who may have previously benefitted from
not paying employees' tax in either South Africa or the
foreign country where they worked, by virtue of the
provisions of section 10(1)(o)(ii) of the Act (the exemption
provision), may be required to pay employees' tax to
SARS going forward.
As South Africa has a residence-based system of
taxation, a person is considered to be a South African
tax resident where that person is either ordinarily
resident in South Africa or is deemed to be tax resident
by complying with the threshold requirements of the
physical presence test. Practically, a person can be
regarded as being ordinarily resident in a place where
they are settled and live with some degree of continuity,
apart from temporary or accidental absences.
The exemption provision currently exempts from
tax all foreign income earned by expats while working
abroad where that expat:
is not a government employee;
was employed and working abroad (i.e. outside
South Africa); and
was employed and worked abroad for a period
of more than 183 days in aggregate and 60 days
continuously, during any 12 month period.
However, from 1 March 2020 the exemption provision
will be limited to only the first R1-million of any foreign
income earned by an expat. All foreign income earned
above this threshold may then be taxable in South
Africa at the applicable marginal rate where the foreign
state in which that expat works imposes little or no tax
on employment income. By way of example, an expat
earning the equivalent of R5-million abroad may now
be subject to tax at 45% on up to R4-million (i.e. the
balance after deducting the R1-million exemption from
their remuneration). This equates to approximately R1.8-
million in tax.
Understandably, some expats are aggrieved by this
change. Concerns have also been raised that limiting this
exemption may increase permanent emigrations from
South Africa and have a negative impact on remittances
to South Africa, particularly for those with lower incomes
working abroad.
National Treasury is, however, firm in its view that the
R1-million threshold is already a compromise and that
from a policy perspective the abuse of the exemption
by some expats unfairly benefitting from “double non-
taxation” (i.e. not paying tax in either South Africa or the
foreign country in which they work) must be stopped.
It is important to remember that this amendment
only applies to South African tax residents. Individuals
who are neither ordinarily resident nor deemed to be tax
resident in South Africa can only be taxed in South Africa
on any income they derive from a South African source.
Some advisers are now advocating that a "financial
emigration" is the panacea to the amendment to the
exemption provision. Financial emigration, which must
be distinguished from an emigration for tax purposes,
however, is not a mandatory step to break one's
South African tax residence. There is no clear step or
deregistration process for an individual to cease being
ordinarily tax resident in South Africa. An individual may
break tax residency in South Africa by either ceasing
However, from 1 March 2020
the exemption provision will
be limited to only the first R1-
million of any foreign income
earned by an expat
to be ordinarily resident here or failing to meet the
requirements of the physical presence test. Considering
the recent relaxation of exchange control regulations in
South Africa insofar as capital and travel allowances for
individuals are concerned, a financial emigration may
well be more of an administrative burden than a benefit.
Partner in the Tax Practice at Webber Wentzel, Joon
Chong comments on the current situation.
“In our view, the true test of National Treasury's
revised policy regarding the taxation of expats will be
the implementation and enforcement of the amendment
to the exemption provision Unfortunately, whether the
amendment contributes to a spike in emigrations (for tax
purposes or otherwise) and the shrinking of the South
African tax base will only be ascertainable after damage
has already been done,” she said
Any expat affected should obtain formal tax advice
from a registered tax practitioner before being caught
unawares by the amendment to the exemption provision.
RESOURCES Webber Wentzel
SA Real Estate Investor Magazine JULY/AUGUST 2019
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