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Tax implications of working overseas

If you are classified as a South African resident you will be liable for tax on your overseas income.

It’s a common misconception that if a South African is living and working overseas they do not have to pay any South African income tax on their earnings.

Although some overseas income may be exempt in terms of the Income Tax Act, it must be remembered that if you are classified as a South African resident you will be liable for tax on your overseas income.

A person will be treated as a resident for tax purposes if they are either ordinarily resident in South Africa, or if they meet the criteria of the physical presence test.

The ordinary residence test takes into account various factors in order to establish the country that would most accurately be described as the individual’s real home. The physical presence test looks solely at the number of days spent in South Africa over the previous five years.

A person will be treated as an SA resident when they meet all of the following criteria regarding the number of days spent in South Africa:

  • 91 days in total during the current year of assessment; and

  • 91 days in total during each of the previous five years of assessment; and

  • 915 or more days during the previous five years of assessment

When is income exempt from South African tax?

Foreign income earned by a tax resident will be exempt from South African tax if the person works as a crew member or officer of a ship which is engaged in the transport of passengers overseas, or in the prospecting, exploration or mining for any minerals from the seabed outside of South Africa. This exemption will only apply if the person was outside of SA for a total of more than 183 full days during the tax year.

In addition, any salary earned by a South African for services rendered outside of SA on behalf of an employer will be exempt – if that person was outside of SA for more than 183 full days (including a continuous period of 60 days) during any 12-month period that started or ended during the year of assessment. This exemption does not apply to income made through contracting, which would be fully taxable.

National Treasury has had its eye on this exemption since 2017 with the initial aim being to repeal it fully. The main reason provided for this proposed amendment was to curb situations of double non-taxation of foreign income such as when an individual’s employment income was not being taxed in either SA or the foreign country.

R1 million exemption

The current proposal by National Treasury to repeal the exemption fully has now softened slightly, and from March 2020 (expected implementation date) the first million earned by a person who meets the criteria for exemption will be exempt, and any income earned above this will be taxed at the normal rates applicable to individuals. The individual will also be entitled to reduce their resultant SA tax liability by offsetting some or all of their foreign tax paid where applicable.

Many SA residents have considered leaving SA to escape the tax net – but for a person who formally emigrates or ceases to be a tax resident, there may be significant capital gains tax implications. The person will be seen to have sold all of their assets, with the exception of immovable property situated in South Africa, at market value on the date they ceased to be a resident and will therefore be liable for tax on the resultant capital gain on those assets.

Regardless of whether a person is considering a permanent or temporary move to pursue overseas work opportunities, it is worth discussing the idea with a tax consultant. These factors can then be included in the decision-making process and help to avoid any nasty surprises from Sars. 

* Jeremy Burman is director of Private Client Financial Services, a division of Private Client Holdings.

COMMENTS   7

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Quote,
Many SA residents have considered leaving SA to escape the tax net.

Fact. Ones leaving do it for other reasons, not tax.
B.E.E is one of them. Number one is finding employment, impossible to find at home.
Leaving is the only choice they got.
In many cases financed by parents hoping the best.
Advice, other as tax, mostly welcomed.
Tax, Sars, experts, living the live in a past dream world.

I wonder how much tax is collected from this. Probably nothing.
Make our tax rates and business environment competitive and stop listening to the 1960s clots from the SACP and you may see growth..in jobs and tax collections.

These fools in the ANC focus on complete rubbish. Imagine no BEE, AA and a corporate tax rate of say 12% in SA….

But that requires leadership…not a self enriching President building a R200mPalazzo for himself in Bantry Bay..having built so many successful businesses as opposed to grossly benefiting from BEE

SARS will have no clue how many young people have left the shores for greener pastures in UK (where many Saffas qualify for ancestral visas), New Zealand ans Australia. The first time they will realize that another taxpayer is missing, is when no tax return is forthcoming. Too late..

If you break tax residency you will fall outside of this. Yes it will trigger CGT but your retirement annuity/pension and any fixed property falls outside, cars, furniture etc as well.

So it is really only fully discretionar investments that you have in shares or unit trusts that is at risk here. Fo what it is worth the first R40,000 of any capital gains on such investments are excluded and remember only 25% of the any gain is included in your taxable income where it is taxed at your marginal rate. So even if you have made capital gains of R1m – I calculate that you will pay tax of R100k on it (assuming a 40% marginal tax rate).

Also worthwhile remembering that you will always have been taxed on these gains – you will now only be taxed earlier than you would have before.

So I really think the choice between breaking tax residency (and possibly paying CGT) or maintaing tax residency (and paying ongoing income tax in SA and in the country you working in) is really not a choice at all, unless you have significant discretionary investments in SA.

All this will do is it puts people further down the path to emigration.

Question:

Emigrate to lets say UK in 2015. Unit trust worth R1m, bought at R0.5 million ie. R500,000 gain.

Keep unit trust in SA. in 2021 return to sell it @ R2 million.

Still only liable for CGT on the R500,000 for 2015, the time you emigrated. The other R1 million gain is free of CGT?

Thanks,

I am not a tax expert so I stand open to be corrected, but the way I understand it is that your emigration/breaking tax residency in 2015 is the first trigger. It then establishes a new base cost of R1m. As I have it you will then still be liable for CGT on the balance R1m gain.

Difference would however be that if you do not have any other SA income in 2021 you will fall in a much lower tax bracket – remember you only include 25% of the gain under your taxable income, which using current rates comes to R50k before rebates

Thanks Notwarren,

I’m thinking that since I’m not a tax resident (residency test passed etc) that I’m not liable for any taxation in SA after 2021 so I can rake in the gains without tax implications – would love a tax expert to weigh in on this.

If CGT is paid up upon emigration, and I’m not a tax resident then surely no income tax.

Are foreign owners of property in SA liable for CGT if they are not registered with SARS?

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