From next month South African expatriates will be required to pay tax in SA on income above R1 million earned from employment beyond the country’s borders.
It’s crunch time for hundreds of thousands of people who will have to decide whether to pay the tax and retain their South African residence status, or to financially emigrate to avoid it. Another option is to rely on double tax treaties signed between SA and other countries, to argue that taxes have already been paid in the countries where they work.
Financial emigration is a drastic measure, but an option nonetheless.
It is reckoned that there are more than 100 000 South Africans in Dubai alone, many thousands of whom will be earning in excess of R1 million a year. There will be hundreds of thousands more scattered across the globe, a good percentage of whom will have to make a choice whether to emigrate or not.
Financial emigration does not necessarily mean relinquishing SA residence or citizenship. It is an approval granted by the SA Reserve Bank to be recognised as non-resident for exchange control purposes.
Under the new tax rules, the first R1 million is exempted from SA tax if the expat spends 183 days a year working abroad. Only amounts above R1 million will be taxable.
Tim Mertens, chairman of Sovereign Trust SA, which has 25 offices worldwide, says those earning substantially more than the equivalent of R1 million a year are likely to financially emigrate. The R1 million threshold includes fringe benefits such as pension payments and housing and travel allowances. For South Africans working in Saudi Arabia, housing and subsistence allowances are typically part of the total remuneration package, pushing many of them over the R1 million threshold.
“We have had a surge in inquiries from South African expats in our various offices around the world, and our sense is that many of the higher earners are planning to financially emigrate. Lower-earning expats, such as nurses and artisans, are probably not earning sufficient income abroad to be affected by the new expat tax, so it is unlikely they will opt to financially emigrate.”
Mertens says there is likely to be a period of confusion as the new rules are bedded down and expats decide which routes to pursue.
“A lot of professional South Africans have gone abroad in search of work over the last decade, and I suspect many of them may not return. They are concerned at the lack of reforms in the country, and the poor economic prospects. Sadly, we may have lost a good percentage of our most skilled professionals to the wave of emigration, but they still have assets and family in this country, so they have emotional and financial ties to SA.”
The tax amendments have attracted criticism from some quarters as potentially counterproductive, in that they could force many high-earning expats to surrender their SA residences.
It remains to be seen whether Sars succeeds in raising additional tax revenue as a result of the new expat tax. Some doubt it will make much difference to tax collections, yet Sars is confident it will rope in considerable new tax revenue.
Sharon MacHutchon, tax consultant at Mazars, advises that the amendment to the legislation that comes into effect on March 1 only affects income received as a result of employment.
The amendment does not apply:
If you are an independent contractor working abroad,
In cases where you earn foreign investment income, or
If you are no longer a resident of South Africa for tax purposes.
South African expats working abroad may already be regarded as non-residents for tax purposes, even though a formal declaration was never made to Sars.
Anyone planning to break tax residency risks having to pay an exit capital gains tax.