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.
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.”
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.