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Implications of the change to tax on foreign earnings

The effects will be widely felt.

Earlier this year National Treasury announced that it intends to change the provision in the tax law that exempts South African tax residents from paying tax on income from foreign employment. Currently, anyone who renders services outside of South Africa for more than 183 days in a 12-month period, including a continuous period of more than 60 days, will not be taxed in this country.

Read: Impending changes to the taxation of foreign employment of SA residents

Under the new proposal, however, the South African Revenue Service (Sars) will only treat the first R1 million of these foreign earnings as exempt. Any income above that will be taxed in South Africa. This amendment is expected to come into effect from the start of the next tax year – March 1, 2020.

There has been a fair amount of concern about what this means. South Africans who have lived abroad for many years in particular have been asking if they will now be taxed twice – both in the country in which they work and in South Africa – but this is only one group that will be affected.

Who is a tax resident?

Speaking at a Glacier tax workshop in Cape Town on Tuesday, the national head of tax training and seminars at Mazars, Diane Seccombe, explained that to understand who will be impacted by this proposal, one has to start by understanding who is considered a ‘tax resident’ in South Africa.

The primary test for this is whether a person is ‘ordinarily resident’ in the country. This is, however, not a clearly defined concept.

“There is absolutely no defined test for ‘ordinarily resident’,” says Seccombe. “In order for us to establish where a person is ‘ordinarily resident’, we have to decide on a case by case basis.”

Read: When tax becomes a turning point for people to stay or leave

Sars has published an interpretation note that considers a number of factors that may demonstrate where someone is ‘ordinarily resident’. This includes where that person’s most ‘fixed and settled’ place of residence is, where their assets are held, their nationality, and where they conduct business.

It’s also vital to note that the interpretation note makes no reference to financial emigration. This means that getting approval from the South African Reserve Bank to financially emigrate does not automatically mean that you will automatically no longer be considered a tax resident.

“If you financially emigrate, that will be one more thing on your list to persuade Sars that you no longer see South Africa as your true or main home,” Seccombe notes. “On its own, though, it is nothing. Do you have to financially emigrate to change your tax residence? No. Does financial emigration change your tax residence? No.”

Only half the battle

For someone who has lived and worked overseas for many years, it may nevertheless be easy to show that they are not ‘ordinarily resident’ in South Africa. If they have fixed employment, assets, investments and family elsewhere, that would be compelling.

“If they look at all the factors that would show that they have taken up a lifestyle in a foreign country, they could objectively show that South Africa is no longer their main home,” says Seccombe.

If they did this, the proposal would have no effect on them. That would not, however, mean that Sars would leave them alone.

On the contrary, whenever someone breaks tax residence in South Africa, they are deemed to have disposed of all of their assets. That triggers a capital gains event.

“For capital gains tax purposes there is a deemed disposal of every single asset you own, local and foreign,” Seccombe explains. “The only exception is South African immovable property.”

Breaking tax residence

This will create a headache for many people who left South Africa many years ago and never clarified their status with Sars. If they break tax residence now, they will have to pay capital gains tax on a deemed disposal of an asset base that they have built up over those years.

Anyone in this situation will therefore want to show that they actually broke tax residence many years ago, when they had fewer assets. It may however be more difficult to show that they were indeed ‘ordinarily resident’ somewhere else going back many years, and they may also be liable for penalties and interest for non-disclosure to Sars, including for income earned from foreign dividends or foreign rental income.

It is also not a recommended strategy to sit this out and hope that Sars won’t ever know that you are out there. It is growing increasingly likely that Sars will identify South African tax residents who have been out of the country for many years due to intelligence sharing with countries around the world. It is therefore far better to make a voluntary disclosure to reduce the liability rather than face the risk of more severe penalties when Sars finds you.

Here and there

These are not, however, the only people the proposal will affect. It is going to have major implications for the many South Africans who work in places around the world but maintain a home here.

This includes those working in mines across Africa; healthcare professionals or teachers in many parts of the Middle East, Asia and Canada; pilots or security professionals in remote areas; and others. In most cases their families and assets are still in South Africa, and their intention is clearly to return.

“For these people we can’t break tax residence,” says Seccombe. “So all of their foreign employment income is going to come into their gross income for tax purposes.”

In some cases these individuals may find protection from double taxation agreements that restrict them to being taxed in only one country. A specific example is anyone working in Dubai for Emirates airline. These instances are, however, rare.

More likely is that they will have to declare income in both countries, and any remuneration above R1 million will be taxed in South Africa.

Importantly, this is not just salary income but fringe benefits as well, which covers things like accommodation and travel.

Anyone who has already paid tax in a foreign country will however be eligible for a rebate, which will reduce their tax payable in South Africa by the amount they have already paid in foreign taxes. This will reduce the tax they pay locally, but will not make them exempt from paying it.

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I’d like to hear more about the approach to double taxation before making much hype about this , does state and federal tax count as well as social security,and how does this get bundled in with income from immovable property in SA??? For the people who don’t pay any tax , I have no simpathy as I don’t see why I need to pay to have state resources spent on getting you out of a flip-flop country when things go pareshaped .Paying tax is a fundamental principal and so is decalaring all your income part of tax law, or am I wrong ?

You are not entirely wrong, but you really can’t spell!

Sorry I know , if it dint have any spelling mistakes then you know I don’t write it 😉 .

I am glad you found something to contribute to this discussion. Those who can’t add spell check?

Media trying to sensationalise this. SARS have released an objective test of residency which Cairns neglects to mention. Never let the facts get in the way of a good story hey Pat?

The physical presence test (which I assume is what you are referring to) is not an alternative to the ‘ordinarily resident’ requirement. For tax residence purposes, the ‘ordinarily resident’ requirement is always applied first. Only if you are not ‘ordinarily resident’ can the physical presence test be applied.

Of course! What is the point of being a financial analyst if you can’t demonize the state to ensure that anger is displaced from the financial or corporate sector.

@DelmasRanger….besides the fact that your comment is riddled with atrocious grammar indicative of a less than savoury education, it also reflects your poor grasp of the invalidity of tax and the race to the bottom it creates

Yes, just go ahead and blindly pay your tax to those thugs in power, as you break your back day in and day out……. and then when your day of pension arrives, you find that little cookie jar has been raided too by those politician fat cats you served so well

realitybites.

So are you an MMT proponent who understands that sovereign government spending doesn’t require taxation or are you a fantasist that thinks a more or less democratic government/public sector can’t do what the private sector easily could?

Of course i am sure you were this sort of radical back in the apartheid era where everyone was taxed with the proceeds being lavished on a small minority.

The government curb employment in this country and when the tax income declines because of policy, mismanagement and theft expect those that earn a living outside the country to contribute are laughable.

How does the government curb employment? If you mean minimum wages then you will in fact find little evidence anywhere that it employs overall employment and plenty that in either way it allows those that are employed to better support those who are not.

I find this very hard to believe that there is hype around this issue. Cleary hasn’t dealt with expats or is just trying to push a freeloading service. Make peace with the fact that they are gone. If you are concerned it is ABSOLUTELY a recommended strategy to sit it out. What terrible advice. Meet obligations of host country first and await guidance. You are also assuming all these people are going to still be south african, once they get citizenship passport expires and goes in bin. Also I always chuckle when tax grifters talk about how tax agencies are communicating. They are not. They can’t even track convicted felons but somehow SARS back office admin putting up roadblocks for your peanuts that you think you owe them.

Not a viable strategy to it sit out in the UAE, where you can never become a citizen and have to leave once your work is terminated. And as you haven’t paid ANY tax there, you are in for a massive problem when you come home.

Unless your name is Gupta or equivalent thereof.

It is almost as though those in the Middle East etc are being targeted as there are a good number of high earners there; pilots for example. How much actual tax it will bring in I don’t know and I’m pretty sure it will diminish quickly as those affected make other plans where they can.

It might have been better to introduce bicycle and dog licences.

When you have a government which has policies that are pure failure, all you can do is wealth redistribution! This is proven with the Zondo commission!!You have a bunch of Zuma people robbing the country and the tax payer KEEPS taking the hit. Sounds like a good coherent government to me OR are they “on the job training” at OUR EXPENSE????Junk status here we come

I’m going to sit and wait this one out and thankfully I have nothing left in S.A.

Here are a few scenarios which will take this whole thing to an international court.
1. The first Million Rand
The rand is volititle and is not a world reserve currency, meaning that when the Rand Tanks like the Zim Dollar, every South African abroad will be liable.
2. What defines being taxed?
Any money which goes to the national and local government should be considered as TAX.
I have a Housing rental contract which the local government claims 10% every month, my drivers licences has R4000 every two years and local VAT, plus their is certain food products which are taxed 100%.

Sorry guys but SARA is shooting themselves in the foot, they have had all this time to get it straight, they are the ones who infact have the wait and see approach.

Most people who are working overseas are paying for their families in S.A. to live, everyone from waiters, drivers and admin (international low income earners) because in SA these jobs do not exists nor do the professional jobs.

Hope is the destroyer of happiness. If you sit it out you will spend the rest of your life with a contingent liability hanging over your head. I couldn’t do that.

I’m also long gone, agree with you.
Just wondering how will SARS exactly travel the globe to come and collect money for the cadres?

Within the next decade all tax agencies will be sharing information as a matter of course, and machine learning will be doing all the work to make the connections. You will be caught and there will be efficient mechanisms to make it worth their while to collect from you.

Except SARS. SARS will have no bloody clue so you’ll probably be fine.

Good,bad, and the ugly. The movie end with good ruling. Reading the local news about higher finance management. The good have to carry on supporting the bad, to make ugly surviving.

“For capital gains tax purposes there is a deemed disposal of every single asset you own, local and foreign,” Seccombe explains. “The only exception is South African immovable property.”

This is incorrect. Any asset which is not subject to CGT in the ordinary course is excluded, eg. endowments, personal use assets, TFSA’s,endowments, etc.

Treasury has also created a situation where those employed in the private sector will be subject to tax on any accommodation and other allowances whilst those in the public sector gets this as a freebie. Oversight or deliberate?

Correct, also NOT subject to CGT is retirement fund assets (pension, provident & RA Fund policies).

As I understand it “a deemed disposal upon ceasing SA tax residency on local & foreign discretionary assets”. Things like shares, UT/ETF’s (luckily a bank cash withdrawal has zero CGT impact)

I foresee a possible UNINTENDED CONSEQUENCE FOR SARS, which perhaps they may’ve not considered properly (dealing with the 1st R1m foreign income exemption)

The potential PROBLEM (for SARS) could be like this:

Say a SAfrican works abroad for a foreign employer (and it satisfies all the Section 10(1)(o)(ii) pertaining to 183/60-day rule), AND his foreign employer deducts Tax on his/her earnings abroad.

Remember, the FULL salary gets already taxed abroad….but is declared in SA as a credit.

Example: say R2 million gross salary was earned abroad (in rand equivalent) and say 25% average tax was deducted by foreign employer = equivalent of R500,000 foreign tax credit.

Then it’s declared to SARS as foreign income, where the first ZAR 1 mil is exempt….so SARS will tax you on the remaining excess of 1 million. Tax on R1m is about R313K within SA.

So this means SARS MUST REFUND the difference of R187K to the taxpayer??

The higher the foreign salary tax, the better this R1mil exemption could work in your favour.

(Accepted, it will not work if the SA employee works in a foreign country that does NOT have income tax, like UAE, but everywhere else, the foreign employer will deduct salary-tax on the full income earned. So back in SA, the first million is exempt. ”
Thank you SARS, GIVE ME BACK a chunk of my foreign tax!”

…now I wonder how long it would take SARS to get the foreign tax credit repatriated into SA (with proper proof/records) from the foreign employer, in order to pay the refund???

Admin nightmare?

(…or do I miss something?)

You definitely missed something. You are allowed to deduct foreign tax paid. You aren’t entitled to a refund of any foreign tax if no SA tax is payable. Simple.

Thanks WTF, I had this possibility in the back of my mind, as otherwise SARS would face unintended consequences.

Hence, if there is an assessed shortfall (within SA) despite paying lower foreign income tax, you simply pay the assessed difference to SARS (and possibly also prov tax penalties & interest…).

And if the foreign tax paid was higher than the tax assessed by SARS in SA (taking R1m exemption into account)….that’s it / no refund.

Accepted.

This is going to have dire skills and long-term economic consequences for SA. I fear we’re well on our way to become a very small economy 🙁

Mike, you have hit the nail on the head with one aspect though, if an individual earning the equivalent of R2mil outside of SA is not subject to any additional tax in SA (because he has paid the respective tax in the jurisdiction he is working), then at what level would an individual pay tax?

Obviously if you not paying any tax at all, you going to be liable for tax in SA – not a lot of sympathy for those individuals.

Assuming R19/GBP1, a GBP100K salary would attract UK tax of GBP27,500 – thus R522,496 tax paid in UK. You have a R1mil allowance, so a salary of R900K in SA would attract R271K in tax….. thus no tax liable in SA.

Also consider that the top tier tax rate in the UK is 45% above GBP150,000, which is the same as SA.

There are 2 risks here:

1. a weakening exchange, there pushing up the ZAR equivalent of your foreign earnings.
2. a big increase in the top tax rate in SA.

I don’t see it as an issue, especially as the majority of individuals working overseas are NOT ordinarily resident anyway.

Whether the majority of (SAn) individuals working overseas are ordinarily resident or not is irrelevant to those that are, or those that aren’t sure!

Plus the fact that those that are no longer resident still have the problem of a CGT liability that arose when their status changed (unless they crystalised it by financially emigrating).

They probably never even considered when their status changed, as until now it never mattered.

I work for a U.K. Company & spend most of my time in various African countries. What I can’t understand is that traveling, accommodation & security will be taxed as perks..? So if I fly to DRC or Nigeria and stay in a hotel for my work, it’s a perk?? I’d rather be at home, but there’s no work. In SA, if I fly to Jhb or Durban for work purposes, it’s not taxed. So 1 crummy trip like that can add R40k to my salary? In some countries, armed security is required (and paid for) by Clients (although I’m safer there than in SA generally) – so now that’s a perk? Makes me want to find ways around this, which, with a truly international setup can’t be too difficult

Try not to come back. Don’t know what to say but things are going downhill fast here

Business trips (travel and accommodation) aren’t taxable perks but travel costs related to your vacation, whether that’s Greece or where your family lives or back to where you come from (I’ll avoid calling it “home”), as opposed to accommodation provided in the vicinity of your usual place of work, is.

Otherwise we’d all use accommodation allowances to reduce our tax. SARS isn’t interested in that fact that you want to retain another “home” that isn’t close to where you work.

“For someone who has lived and worked overseas for many years, it may nevertheless be easy to show that they are not ‘ordinarily resident’ in South Africa.”

Pensioners – Does this effect a South African who is now retired on European government and private pensions, and who now lives back in SA after 3 decades of working and paying tax, accumulating assets and investments, in that European country?
Or does it only apply to tax payers who are currently still employed overseas, not yet having reached retirement?

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