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

But practical and administrative considerations are still on the table.
If South African expats cannot offset their foreign tax credit against their South African tax liability they might end up paying tax on the same income twice. Picture: Mike Hutchings/Reuters

It is clear that the policy decision to cap tax-free foreign income from remuneration at R1 million is set to stay, but the administration of and practicalities around the amendment are still open for discussion.

National Treasury held a workshop with several tax practitioners and industry bodies earlier this month to address some of the remaining concerns raised in comments and discussions about the 2017 amendment.

Erika de Villiers, tax policy advisor to the South African Institute of Tax Professionals (Sait), says it is quite clear that Treasury is sticking to its policy intent with the amendment.

“They want to find a neutral tax position between South Africans working in South Africa and South Africans working in foreign jurisdictions.”

Benefits versus necessities

One of the concerns raised is that in many jurisdictions certain benefits are more of a necessity than a benefit, such as security.

Treasury does not want to be seen to be treating a fringe benefit such as security differently in another jurisdiction than security costs in SA, which is also a fringe benefit when provided by an employer, says De Villiers.

The Income Tax Act was amended in 2017, but the implementation of the tax-free cap on foreign income will become affective in March next year. Taxpayers and tax practitioners have been lobbying quite extensively for more generous relief to take account of circumstances in other jurisdictions.

One issue that seems to be a sticking point is the provision of residential accommodation by employers to people who are on secondment in other jurisdictions.

Sait’s mining work group made a submission at the end of last year, asking that consideration be given to place a nil value on the residential accommodation fringe benefit.

Andre de Klerk, chair of the mining work group, says in the submission that many of the mining groups headquartered in South Africa offer accommodation on mine premises.

One-formula-for-all not practical

This accommodation is basic at best, but because of the formula used to calculate it, the value of the fringe benefit is “disproportionally high”.

One of the variables in the formula is the remuneration of the employee. Many are highly qualified engineers who are paid handsomely. 

“The real benefit experienced by the employee is normally much less, taking into consideration the nature and location of the accommodation and the fact that the employee is often stuck at the mine with very few options, if any.”

According to De Klerk the formula used to calculate the fringe benefit pushes up the total remuneration of South African expatriates. The result is that a large part of their remuneration is likely to be above the R1 million exemption threshold, which serves to disincentivise working at these mines.

De Villiers says Treasury’s initial response was that they want to treat accommodation fringe benefits neutrally between South African employees and expats.

Exemption for inbound expats

However, it was highlighted during the workshop that there is an exemption in the fringe benefit legislation for inbound expatriate employees.

In terms of the exemption the employee is not taxed on the accommodation for two years from the time they arrive in South Africa and start working.

“There is already scope if you want [to] tax neutrally … outbound expats should then also get relief on the accommodation fringe benefit for at least two years to put them on par with inbound expats.”

It appears Treasury will consider this.

According to De Villiers there seems to be willingness to make some “consequential amendments” to the Act; changes related to employee tax (PAYE) that may allow for a foreign tax credit on a monthly basis.

If employee tax is withheld in the foreign jurisdiction, while in South Africa there is talk of “enabling legislation” to allow for the offsetting of the foreign tax credit against the local PAYE – that dovetails with the practical administration that the South African Revenue Service (Sars) will have to do, says De Villiers.


“I think it is incredibly important that Treasury gets a full understanding of the practical complexities of proving that tax was withheld in the foreign jurisdiction.”

Jean du Toit and Jonty Leon, both tax attorneys at Tax Consulting SA, say it looks like payroll personnel, South African expats and Sars officials are “in for many growing pains and an overall torrid time” when the amendment kicks in.

They said in a statement that one comfort is that Sars will set up a dedicated head office function to deal with matters pertaining to the amendment.

De Villiers added that there is a huge onus on tax practitioners who represent the tax-paying community to provide Sars with adequate information on the factual patterns they are aware of in foreign jurisdictions.

“Sars says it will provide guidance on what they will accept as proof of tax being paid or withheld in foreign jurisdictions. If we do not give them a comprehensive list of what we normally rely on, their list will not be comprehensive.”

The consequence is that if South African expats cannot offset their foreign tax credit against their South African tax liability they might end up paying tax on the same income twice.

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Excuse me! There is no equal treatment. I pay tax from the first penny of foreign interest, foreign dividends, foreign capital gains, foreign client consulting.

Either excuse my first million too or everybody pays from the first penny. If you work on rigs or for six financial companies and count your days in different jurisdictons so that you pay tax nowhere : tough!! If you are an SA resident pay tax here with credits for foreign taxes paid. Don’t like it it, then move your wife and kids to that nice american school in Dubai, permanently emigrated.

The impact of any Double Tax Treaty (DTA) between countries, will in theory determine which country has the right to tax income. Keep also in mind countries like SA have a “residence based” system (you pay tax in the country you consider your home, on worldwide income), while others have a “territorial” or “source based” system (irrespective where your normal home is, tax will be deducted in the country where the income originates/that provides the work.)

It involves extreme specialised tax knowledge, and must admit most tax practitioners grapple with it, is understandable.
Even SARS is misguided these days, by thinking if a person does the formal Financial Emigration route (with the SARB), then one is considered a non(tax)resident, which is not true. Financial Emigration and Tax Residency are two different things…the former applies to SARB processes and the latter to SARS.

My personal gripe is that there are so many administrative pitfalls & potential difficulties with SARS (especially where foreign tax credits needs to be given, long delays, onus of proof, etc) that I think tax-practitioners needs to factor in a new fee-category in their invoices due to complexity. Ugh..uhm…

Your 3rd paragraph worries me a bit. I am an expat living and working in Hong Kong for the past 2 years. I was under the impression that financial emigration would set you free from this expat tax crap. At least that is what everybody, even the tax consultants, say. I do not know of any other way to avoid paying this tax.

For the record, I fail the ordinarily resident test by a long way. I do not have a wife or kids in SA and I do not plan to ever return permanently.

Everybody is up in arms about this as if it is some sort of monstrous, confiscatory tax regime. All it is, in simple terms, is closing a loophole whereby people who are – for all practical purposes – resident in South Africa (and nowhere else) game the residence-based taxation system. These people and their families are living in SA and benefiting from services and infrastructure funded by the public purse, so it is right that they pay. People who are truly non-resident will still not pay tax in SA on the residence system and that is right and fair.

I am sorry but what you fail to realise is that those expats and their families are paying taxes all the time. VAT,Fuel Levy taxes,Dividend Taxes,TRansfer duty taxes etc. My point is the rate is not 45% tax its way above that and those expats sending money to be spent in SA to pay their families expenses are paying tax just like you are but its all those involuntary taxes. Another note is you dont cater for BEEE and the fact that certain people with degrees and skills will not get a job in South AFrica so the government blocks them from getting an income and thus they have to get employment overseas but at the same time the same government blocking them locally want to tax them on their foreign income earned. Dont you think morally or ethically that is not a fair policy. Just take an example there was a dividend tax added a few years back.Imagine how much extra revenue that created for SARS to collect 15-25% of every company dividend paid…its billions of rands. Yet Eskom Powerstations are not built and all the SOEs are mismanaged and defrauded. Now Eskom gets another 10% increase from NERSA but wait a minute those funds havent helped before how are they going to resolve the issue now. So do you feel happy about giving hard earned money away as taxes to inept corrupt individuals who have had 10years of plundering the coffers and not delivered anything? I look forward to your point of view. Example if i got a builder to build me a garage and 10years later the garage is not built doors not funtional am i goign to give him a 10% increase to finish the job ??? Ummmmmm NO!!!!!!!!!!!!!1

There are so many issues conflated in this comment that it’s hard to know where to start. The question of whether income tax in particular (as opposed to other taxes) is being squandered by the government is quite separate from the question of whether people living in SA but working for periods abroad should pay income tax. No sane person can argue that the ANC-led government hasn’t squandered vast sums of public funds – that’s not the point here, as I see it. The BEE argument you make is interesting but, at the end of the day, if they are working abroad because they can’t work in SA, and leaving their families in SA, then they are no worse off paying SA income tax (provided they are credited for any foreign tax levied, which I believe they are).

Pieter, simply no

I also pay VAT and the other taxes you mention – on top of income tax. The mismanagement and corruption and BEE impact me equally to Johnny that works 100 days in Mauritius, 100 days in Bahamas etc etc and pays zero income tax. Take away the loophole, but give full tax credit for foreign taxes actually paid.

Imagine there was a loophole that said people borne on Tuesday don’t pay any income tax. You were borne on a Monday : how does that make you feel?

Can you explain why people who are truly non-residents will not get taxed? If so, then 90% of people misunderstand this.

You are absolutely right that this minor tax change is roundly misunderstood. If somebody is truly non-resident (i.e. they actually live abroad and don’t trip the various simple tests for residence), then they will not be subject to SA residence-based taxation. This change only affects people who are de facto residents but claim not to be through technical compliance by jumping through hoops about days here and there. Some people read a tweet on this topic and conclude that SA is moving to some sort of USA-style tax on worldwide income based on citizenship. This is just not the case.

End of comments.





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