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Earning foreign income? Prepare for new tax now or get hit hard later

Under the new legislation, SA tax residents abroad will be required to pay tax of up to 45% of their foreign employment income.
Many South Africans living abroad aren’t aware of the new requirements or the consequences of choosing to follow the financial emigration or cessation of tax residency route. Picture: Shutterstock

South Africans living and working abroad should be doing more to prepare themselves for the implementation of the country’s new expatriate tax on March 1, 2020.

Under the new legislation, South African tax residents abroad will be required to pay tax to Sars of up to 45% of their foreign employment income, where it exceeds the R1 million exemption threshold.

The only practical ways to avoid doing so are to financially emigrate through a formal process which, as a consequence, ceases tax residency, or to cease tax residency, without the need to formally emigrate.

Many South Africans living abroad aren’t aware of the new requirements or the consequences of choosing to follow the financial emigration or cessation of tax residency route.

My concern as a tax practitioner is that not many expatriates in this position understand what the impact is going to be. 

Unfortunately, many expats believe that they are non-residents from a tax perspective, because of the fact that they’ve spent a number of years outside South Africa, and their stated intention is to never come back to the country.

This is simply not the case. Unless you have financially emigrated, or ceased tax residency (without necessarily emigrating), you are still a South African taxpayer as far as Sars is concerned. And this means that you should have been submitting information about your income to the revenue authorities during the years you worked outside the country.

Choosing which option to take isn’t always easy either.

What a lot of expats have discovered as part of this process is that if they cease South African tax residency, there’s a deemed exit charge from a capital gains tax perspective at a maximum effective rate of 18%, which most of them haven’t budgeted for. 

This is particularly true of South Africans living in low tax jurisdictions like Dubai – where no income tax is levied – who may have built up substantial offshore assets with tax-free income.

Expatriates in this position need to take a very hard look at their finances and see whether or not it makes financial sense to formally exit the South African tax net and suffer a once-off capital gains tax charge at a maximum effective rate of 18% on their worldwide assets.

Figuring out what action to take can be challenging. It’s an emotionally and technically delicate position with a number of variables to consider.

What is clear, however, is that doing nothing is not an option.

Ruaan van Eeden, managing director, Tax Advisory at the Geneva Management Group.

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If Johnny has been Offshore since 2010 and met the requirements for not being a tax resident back in 2010 already, then would his of deemed emigration not be 2010??? His assets and income since then are irrelevant to SARS and he owes CGT on 2010 asset positions.

LOTS of people simply moved to another country and never filed here again, not all of them high-flying financial types transferred to London or NY. (eg ex military, farmers up into Africa).

If you are one of the lucky ones earning money overseas, just sell, pack and go, all smiles.

Tell SARS where to go.

Do you see Ex-president Zuma worried about having a sixteen bedroom house in Dubai?

Many of the ones earning a living in other country’s as home did so mostly for one reason. Called state law BEE. The results are to watch and listening on TV news broadcast every day. A complete disaster and proof how to run a economy in the ground. To hunt for money by a emigrated generation is totally unrealistic as is the one million rand threshold. To earn money like that is proof the best available left. Coming back for one reason only. Visiting families an enjoy the sunshine. Not for paying taxes.

That is the reason they are being persuaded. I think the realization has set in that many or even most high income earners have been forced out and that this has eroded the SA tax base. Answer – one tries to victimize the same people for a second time so that there is more money to steal and waste.

Once again SARS hounding honest hard working people. Doesn’t matter if its legal or not. They will find a way.

What are the implications of this legislation for people working in countries that have a double taxation agreement with SA?

You get a credit for foreign tax paid-and pay the difference to the ANC thugs to steal!

Tax laws should be like all laws not discriminating. Read the news. Millions are offered to keep silent. Interesting part. Tax experts an accountancy should ask the questing, coming from who? Apparently owners of millions are not targeted as the sod who make a honest living.

Did any of the people living abroad in exile before 1994, ever made an effort to pay ANY taxes to South Africa?

That would be racist now 😉

This seems like another advertorial, albeit somewhat better disguised than the previous ones on this subject.

The majority of people who live and work overseas are not tax resident already.

Ignoring the fact that even the “professionals” don’t fully understand the legislation changes (or they ignore key points to instill fear and drum up business), I really don’t see how this will be implemented.

There are hundred’s of thousands of individuals working in London alone, on a temporary non-resident (TNR) status. They will be above the R1mil threshold and the maximum tax rate in the UK is 45%, however only post GBP150K, so depending on the exchange rate, these TNR’s are subject to SA tax between GBP70K and GBP150K (unless the maximum tax rate is increased this budget, which is likely).

So now SARS needs to track you in the UK (CRS relies on you disclosing your tax number in SA whilst working abroad). They need to confirm your income. And finally, they need to get you to pay the tax….. I would personally tell them to f* off.

Even tax professionals differ on this issue (which remains one of the most complex, especially when one bring in Double Tax Agreements into the picture).

According to various SARS (practice or interpretation) notes, the definition of a Non-Resident (for SA tax purposes) evolves around the “Ordinary Residence Test”, which takes precedence over the (secondary) “Physical Presence Test” to determine whether an SA expat is regarded as “SA resident temporary abroad” (..then the 183day/60day-rule applies re the Foreign Income Exemption…of which from 03/2020 only the first R1m p.a. will be exempt) OR if a person has become “non-resident” (no SA liability to submit returns).

The question is: WHY over the past year or so, the term “financial emigration” comes up?? What happened to the good ol’ “Ordinary Residence Test” now suddenly discarded?? Doubt it. I wonder if SARS has simply made it their own interpretation to apply “Financial Emigration” (i.e. where you notify your local bank & do the SARS emigration tax clearance) as the sole determining factor…which is for SARS easier to determine, instead of proving the real intentions of the taxpayer being “living in a foreign place with a degree of certainty” / his place of abode is / a residence that is “settled & certain” / where one return to after your worldwide wanderings…

Now, Fin.Emigration is mostly done by expats under the age of 55, where they want to access their full retirement savings locked up in past employer Pension/Provident/Preservation & RA Funds. Only way local asset management comp will transfer your funds out in a lumpsum (prior 55) is by supplying a SARS Emigration Tax Clearance..which goes along with the Fin.Emigration process.

If an expat does not perform Fin.Emigration, his/her local bank account in SA will not be “non-res blocked”…and you can still withdraw your SA retirement savings after 55, albeit with the restriction of the one-third/two-thirds split, where the lumpsum can be abroad (after tax) as discretionary funds, while receiving the compulsory 2/3 as a monthly annuity, into your SA bank account, which you can transfer abroad on regular basis (post retirement). It could be to your tax advantage (post retirement) to have part of your retirement/life savings paid from an SA asset manager (as PAYE tax will be deducted in SA, and will a tax-exempt in foreign country), and as the annuity income will be much lower (attracting less PAYE tax) in comparison where you transfer all your ret/life savings abroad, and then pay higher rate of tax on the combined/higher income streams into one single country. E.g. say half of your retirement income from SA (taxed less in isolation of global income), and the other half of your life/pension savings accummulated abroad where the expat now lives, will only attract the relevant tax rate how much you receive post retirement, calculated by each source.

Flipside of coin, is that people fear what may happen to SA asset management industry, when/if Govt prescription becomes (again, like the 80’s) a reality. Many want everything abroad, but could pay higher tax post-retirement, compared to splitting your retirement income streams from at least 2 global regions and have a lower income tax working in your favour.

Lot to chew. Just made this topic even more complex as it already is 😉

@MichaelfromKlerksdorp.The most helpful comment here. Your second paragraph is the most important. You need to understand your position based on these three residency tests. This will determine your potential tax liability.

@Michael… Not sure about the idea of paying tax on a pension in SA in order to reduce tax liability in another country. If you are tax resident on the other side of the pond, it’s likely that you will pay tax on your worldwide income in that country. You will probably get a tax credit in that country for what is paid in SA, but the extra due, if any, you will have to top-up on the other side.
It can get a little more complex if you invoke a tax treaty but the general idea of the treaty network is to ensure that people pay tax someplace but do not get taxed twice.

@ ice. Good points! 🙂

From an SA resident perspective, if a pensioner (residing in SA) receives say a British pension (or from any other foreign country for that matter), the foreign pension coming into SA is exempt from SA income tax. (Section 10(1)(g) if I recall). The reason is that the foreign pension is “taxed at source” in the UK.

The reverse would usually apply: if you live abroad, and receive an SA source retirement annuity or fixed pension income, it would be taxed in SA, before it gets paid into your SA bank account…whereafter you can transfer it abroad. Yes, one is still need to declare income on worldwide basis (e.g. property rental, foreign interest & dividends, etc) but a foreign pension is usually exempt in the country it’s received in. There may be exceptions, but should be few.

Hence if one can have (post retirement) a situation from multiple pensions across the globe, and while paying little tax from each country (taxed at source), would be ideal. Yes, you would still pay tax on each pension income, but taxed at lower rates in isolation of other income streams that could push the marginal bracket up in anyone country.

Pass the day count tests and then look at ordinarily resident tests. If you are not resident under either tests then you have ceased to be a tax resident and are liable for CGT on worldwide asset gains irrespective of financial emigration( an artificial nonsense called exchange control).

Michael ….interesting points there. Another potential article here to be written from the perspective of somebody moving to SA with offshore loot. Not sure there will be too many moving in that direction in ten years time. But I agree the whole cross border pension issue has potential planning opportunities …and pitfalls

Anyone know if you still have to comply with the 183/60 day rule with this new law? Or does a person working overseas (still lives in SA) just pay the tax over the R1m free threshold?

A lot of these articles seem to be from people selling financial emigration services, no doubt with lots of lucrative fees attached. Take the fear-mongering with a huge pinch of salt.

My first thought too. Somebody is about to try sell me something???

So it’s not enough that my family back home are subjected to VAT and tolls and the fuel levy etc etc. Now i must pay PAYE on my income???
Bearing in mind if it were not for a weak economy and AA and BEE…..I would not have to work away from home for 11 months of the year!
Easy fix though…I’ll get my employer to issue a salary certificate stating i earn under the 1 million threshold. Up yours anc….

Tax Advisory people trying to instill fear and generate clients. This will all become clearer at the time of submission of your 2020 tax return which will be due in July 2021. So people sit back and chill, we have 2.5 years to work it all out. Just look who wrote this article, Ruaan van Eeden the managing director, Tax Advisory at the Geneva Management Group.

If someone is trying is drum up business and gives away information free of charge, so what? good luck to them. Or do you want them to work for you free of charge while you sit on your chair stoning them? If they give misleading information by all means get out the flamethrower but play the ball ,not the player

People who have said it’s an advertorial have explained why: people who live overseas are already not tax resident, making this article moot.

It is easy to say “site and chill” but it is not unknown for some “lawyer” with access to SARS to pop up with a civil case in the US; claiming that some expat (who may have left SA twenty years ago and never returned) to be liable for some massive tax; US$10m. In the case I know of it was blatant extortion, likely fraud but countenanced by the US (sort of 1st world court system) meeting the SA, 3rd world fraud and corruption system. The “lawyer” may well have been a Nigerian but he had some genuine details from SARS and a scheme to cripple the individual by effectively stealing their legitimate documentation.

So be alert, do the paperwork, keep it very safe and do not leave a forwarding address with SARS.

My advice: If you are able to get work overseas, stay there! Don’t come back to this dump!

Best advice on this site!

Clearly paying TAXES makes you an accompliss to a crime of fraud and corruption we all know of committed by the ANC. I am with Helen Zille that a TAX revolt should occur and citizens stop handing over money to a corrupt incapable ANC government. Prime example of incompetence and corruption is the ESKOM powerplants which are now doubling in price due to incompetent contractors who are milking the SA tax payer and the CADRES linked to the ANC Top brass who are financially benefiting out of the tenders they have. The fact that the contractors in some cases do not have the technical expertise to do the job. The TAX payers may as well go and hire our own contractors pay them directly to complete the job and we may actually see the Power Plants get completed in our lifetimes. This is absolute nonsense to allow this to continue.

Seems more and more governments are chasing the small guy. SARS seem to be following the USA tax route, that is why you are asked if you are American, so I wonder will the banks abroad start doing the same thing to Saffers abroad, asking birth place, sending details back to RSA. But the USA is particularly cruel as it taxes any person born in the country (even if they left at 2 days old) or are born to US parents. You may never have worked or lived in the USA or have the passport but if your birth place bears the stigma of “Born in the USA” you have to submit tax returns and declare everything, Borris Johnson being one of the more prominent persons caught (https://www.theguardian.com/politics/2017/feb/08/boris-johnson-renounces-us-citizenship-record-2016-uk-foreign-secretary)

End of comments.

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