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Looming ‘expat tax’ is ultimately fair

The concern is that there is little understanding of practical issues facing employers and employees.

The amended section of the income tax act concerning the foreign employment income exemption comes into effect on March 1, 2020. This so-called “expat tax” has caused concern among South Africans working abroad who currently pay no tax if they meet certain criteria. But, from next year, only R1 million of this income will be exempt from tax in SA.

Read: Panic, uncertainty about expat tax

Such is the anxiety around this change that National Treasury held a workshop on March 6 to address the industry’s worries. There is concern that there is little understanding of the practical issues facing employers and employees. Treasury also indicated that it is not interested in a policy change and that the R1 million exemption will not be increased. However, the hype around the proposed change is clouding its fairness.

Read: No change to policy intent on capping tax-free foreign income

Let’s look at this without the emotion attached. If an expat is earning money outside South Africa but still owns property, has a family who lives here and wants to be seen as a South African, it is realistic for such a person to be required to pay some level of direct tax. And the R1 million threshold is quite reasonable considering the tax thresholds enjoyed by employees working in South Africa. 

Admittedly, most affected taxpayers are probably earning hard currency and the current weakened rand will, to some extent, negate the impact of the R1 million exemption. But expats do need to be taxed in some way.

If an expat is already paying direct tax in another country, then the effect of the new SA tax may be mitigated by tax paid elsewhere in terms of a double tax agreement with possible minimal effect. However, it is likely to be felt the most by those people working in tax havens, many of which have high levels of indirect taxes such as VAT, but where there is no payroll tax.

Who does Treasury have in its sights?

For individuals earning less than R1 million abroad, this new amendment will have little impact, but Treasury is more likely to be targeting individuals such as pilots or oil rig workers who effectively retain a base in South Africa, but who work for an offshore company. Until now, these individuals were exempt from paying tax in South Africa, despite enjoying the benefits of their families living in the country.

It will be a challenge for someone who, until now, has not been paying tax to start doing so, but the impact might not be as large as has been reported. It is worth noting that the first R1 million of income is completely tax free, which is already a significant benefit if you are working in a country with a low tax bracket. You will only start paying tax in South Africa on the first rand earned from employment after that R1 million.

Be sure to seek the best advice

Of greater concern is the misinformation currently circulating around financial emigration, which is being touted as a way of continuing to pay no tax. This is not true: financial emigration does not necessarily exempt you from paying tax in South Africa.

In spite of emigrating, you are still liable to pay tax on any South African-sourced income and may also be found to be a tax resident. Exchange control residence and tax residence are two different issues, although formal emigration is a way to show the intention to break your tax residence which has a capital gains tax implication. It is therefore essential that you obtain the correct advice from a qualified tax practitioner before making any decisions or applications regarding your assets and tax affairs.

Another problem is for people who left South Africa years ago, but have not financially emigrated.  They may no longer be a tax resident in South Africa because they have been living abroad for such a long time. These individuals should try to clarify their status as taxpayers, but it is unlikely that the intention is that the South African Revenue Service (Sars) be able to apply the expat tax to them. It should be noted that expats who have not been submitting tax returns in South Africa, although they were still South African tax residents and thus ought to have done so, are in default with Sars and financial emigration will not fix their tax compliance issue in retrospect.

Cross-border information sharing: no place to hide

It is also worth noting the impact of cross-border information sharing on the implementation of this expat tax.

Firstly, since expats have always been required to complete a tax return in South Africa, even if they were exempt from paying income tax on foreign employment income, this information is already available to Sars. On top of that, due to information sharing between countries and banks, Sars will know exactly how much is paid into anyone’s bank account.

Information sharing agreements were specifically noted by finance minister Tito Mboweni in his 2019 National Budget as a key focus area for fixing Sars and tightening the tax net. This means that expats too will increasingly be on Sars’s radar, underlining the importance of ensuring that your affairs are in order and in compliance with these new proposed amendments.

Hilary Dudley is Managing Director at Citadel Fiduciary.

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COMMENTS   24

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No it’s not fair and if DTAs don’t apply then it’s extremely unfair. Why should SA get a cut of work done offshore for a offshore entity? It makes no sense and I can imagine there will be a lot of people refusing to pay this at all, especially if they are living abroad.

there is too much hysterics about this

1. If you are not an SA tax resident, the entire issue is moot.

2. If you are then IMO you should be taxed here on your global income exactly how I am taxed here in foreign dividends, interest, consulting.

The R1m exemption should not apply but foreign taxes should be deducted obviously, as they are on withholding tax on foreign dividends, interest, etc.

“..no place to hide”

Always threats from this regime and they will steal the money anyway! To all of those living abroad, stay there! Do not give this regime one cent until they represent taxpayers and address their concerns (never in other words)

If Government chases you offshore with their racism and destruction I say ‘Don’t pay it a cent’.

This may be of interest. Currently if you go overseas to work you can claim a variable amount for S&T without producing receipts. About GBP120 per day in UK. So in a year that would be GBP44000. And then airfares as well.
Will you still be able to claim that?

I am a South African tax resident. Can I please also get a 1 million exemption?

No. But you do qualify for an electricity exemption in terms of which the government will cut your power twice a day until further notice.

Isn’t it ironic that you have to pre-pay for a product they can’t give you (unless you are a Soweto resident)? Is there any other company like that in the world?

Paying any tax to this government is insane. The ANC simply steals it through cadres etc.

All this will do is it will force people to break tax residency in SA, which will have no negative consequences, except if you have large discretionary investments in SA – outside of an RA or pension fund or more than one property.

It seems the author bases his argument of fairness on two points (i) expat that still owns property in SA or (ii) an expat that still has family in SA.

To which I would counter that (i) property owners pay property tax and pay for all services delivered so they do not take anything from the fiscus. (ii) Not sure which family she means, very few if any expats will work abroad and leave their children who are still minors in SA so I can only assume that she refers to parents and siblings. To which I will respond that these individuals do pay tax (or have paid tax if they are retired) in their own right so why does it make it “fair” to tax an expat if he has taxpaying family in SA

Really poorly constructed argument for someone is such a senior position. Irony is also very rich considering that Citadel makes a fortune helping wealthy South Africans dodge taxes and ship their assets into tax havens.

Typical hypocritical flag waving by corporate SA, always proclaiming loudly to be proudly SA and expres its support for all the hare brained schemes of the ANC while feathering their own nests offshore

https://www.citadel.co.za/solutions/offshore-structuring/

In fact there are many people who leave their families behind in S.A., I had to when my son was 4 months old. I was got re trenched and could not find work so with the last R50 in my pocket I found a job and for the better part of two years I only saw my family 3 times.

Eventually after saving enough I managed to get them to be with me. In that time I was away I would send as much R30,000 to keep things going very month.

Now that my family is with me my purchase power has decreased because of how expensive things are. My now 3 year old school fees are R120,000 a year.

There are many South African were I am because the Goverment run by the anc has failed to create an environment that is conducive for growth or even stagnation.

South Africans abroad send approximately R10 billion a year home.

“despite enjoying the benefits of their families living in the country” – Such an idiotic argument. Most spending and financial exposure in ZA involves some form of tax, so the fact that you are sending money home means Gauvamint is extracting tax. Now, also paying income tax means you are double/triple taxed, like most income-producing citizens, even though you don’t even live in ZA.

Same old, same old article with zero new info.

What is in the R1 million? Can the expat deduct the horrendously high expenses of traveling to and from SA to offshore? What about rapacious accommodation charges offshore.

If these expenses cannot be deducted then the R1 mill is tragically way too low.

Having lived in the ME for 12 years, the 1 Million exemption is too low. Most expats have to live in ‘Western’ compounds which are paid for by the company. A decent 3 bedroom villa will cost around 200 000 Riyals (760 000 Rand) per annum. Private schooling is a must for kids, if you want them educated in an english medium school and this will cost around 70 000 Riyals per child , per annum. So 2 kids will cost 140 000 Riyals or 532 000 Rand per year. Just these 2 costs exceed the 1 Million Rand exemption. What about all of the other costs?

Sorry to confirm what you know: the R1 million is a number that means all the waiters, nurses, etc, working in the UAE (and largely of colour, by the way), will not be impacted. They return home one a year, they live in cheap accomodation, so no change for them.

But, if you have a nice job there, where your skills are actually wanted….well then, they will boil you slowly like a frog.No compensation for ridiculous security costs for your family in SA (due to bad policing), nothing for high medical costs (no-one here wants go to state health-care), etc, etc.

Note that service delivery protests are currently restricted to mostly poor communities – this should change. Something about “no service, no tax”

I guess SARS will be able to communicate with expats via carrier pigeons seeing as they won’t have any electricity soon anyway.

Idea: If you’re an expat with dual passports, open bank account abroad on foreign passport, get paid in there, bring back card to SA and use it to withdraw.

SARS proof?

If using SA bank passport to open bank account abroad, not sure though if SARS can track that.

Terrible advice… You have to provide tax residency details to open the bank account, automatically shared with SARS…

You will have to consult through a foreign company, so it earns revenue out there, expense all costs and leave the balance there. Dividend to yourself at 20% if you have to move money back here, or just take low interest loan from company and boom…

The Tax Petition Group strongly condemns the view of Citadel and we find it mind boggling that the Board and Executive of Citadel can support Hilary Dudley opinions. I am unsure whether to find, excuse the pun, this view hilarious or the article a dud. Citadel, please provide us with evidence (with no “emotion attached”) –

What is the reason for you viewing paying direct tax now, when; for the past 19 years, since the residency basis of taxation in 2001, and 100 + years before when we were on a source basis of taxation; there was no reason to pay direct tax. We all know the reasons why the taxes are now so desperately needed, but that is not the expatriate community’s fault. I am calling Citadel out to explain why fair, now, suddenly?

What research can you provide to back Citadel’s view that the R1m threshold is “quite reasonable”? I would not dare suggest Citadel expressing an unresearched view, but just to put minds at ease how did you derive at your firm’s view? Perhaps give some UAE examples (which is kind to you as we do not have security issues, so no security taxable fringe benefit as in many other locations, eroding the R1m threshold). Please share your data on the cost of housing in the UAE, flights home, medical care, transport cost, cost of living comparison, education and child care fees; all fully taxable under this law Citadel is so passionately supporting; showing your meticulously computed outcome as “quite reasonable”?

Your view is impacting the lives of thousands of decent South Africans, in many cases with no choice but to work abroad. We are awaiting your clear answers to valid questions, so no waffling and speculation – enlighten us with facts which underpin your views. Citadel does after all ask South Africans including expatriates to entrust them with their investments, so your answers will reconfirm our trust in professionalism and researched outcomes. http://www.taxpetitiongroup.co.za

Barry: i bear no candle for citadel

BUT please explain why even R1m should be exempt? Stuff it. I pay tax here on the first dollar I earn offshore, so should the people that manage their diaries to spend X days per year working in 5 different tax havens while wifey and kids live in SA.

If you don’t like it, change your tax residency with all that entails. Including CGT on exit. Go ahead, become a San Franciso resident at 52% tax rate. Tax harmonisation will eventually catch up to to all the bottom-feeding parasites of the world.

Aside from the gross opportunism of both the ANC “government” and Citadel (can they fix a scheme for you where you still pay no tax?) I would say the R1m should at least be exempt as some foreign country is actually providing the services usually due to a taxpayer (just not an SA one). Also, as noted, the tax system may be different, with high VAT, low personal tax so the individual still pays, not in the same extortionate, unfair (CGT) and thieving way they would do in SA.

Finally I note that nasty little sting of non-compliance extortion if one has lived (and paid tax) elsewhere for an extended period, taking nothing from the tax funded services in SA. This hardly seems fair, rather just petty extortion.

Nah, just another sly, money making “something for nothing” scheme so beloved of the ANC and its communist / socialist fellow travellers (“Judge” Davis).

It’s clear that this is the latest moneygrab by the increasingly desperate regime.

But, it will backfire like all of its plans backfire, when people working abroad crunch the numbers and realise that they’re better off wrapping up their affairs in SA and emigrating permanently.

Not only will SA lose the foreign income that they have been undoubtedly been sending home, but it will also lose on the value of the remaining assets that exist in SA when they’re sold and the money sent overseas. I bet that enterprising people will find ways to dodge most of the CGT too.

In the end, the hole is simply being dug deeper, as usual.

As an American I have had to EVERY YEAR, pay taxes in America and here. Realize South African’s that this country is broke (DUE TO ZUMA) and they have to find extra money “somewhere??” They will tax & tax & tax. How about fixing the main problem, JOBS & EDUCATION???? NOPE !! By keeping people under-educated they are easier to control and more reliant on the state. This keeps the politicians jobs in tact!

Someone earns income overseas using their infrastructure, their power, roads, medical services, fuel etc. That money is then spent in South Africa and included in the price of what gets bought are all VAT + import tariffs, fuel levies & taxes, Eskom mismanagement taxes etc (since every price indirectly includes all of these).

SARS did not need to provide any infrastructure, but I can collect on an array of taxes… If anything they should encourage people work outside the country and spend their money in SA. Like making money without needing to build infrastructure… Hardly seems fair to the taxpayer that their should be taxed more… I can see why my friends moved to Hong Kong with their 15% tax

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