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Tax D-Day looms for South African expats

From March 1 they will have to pay SA tax on income over R1m earned abroad.
Financial emigration does not necessarily mean relinquishing SA residence or citizenship. Image: Shutterstock

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.

Read: To financially emigrate or not?

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.

Read: Looming ‘expat tax’ is ultimately fair

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.

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Try to immigrate, who wants to live in this crime-sick country

This article is FUNDAMENTALLY MISLEADING. It is not all expat’s, and certainly not all South African citizens, that will be impacted by the changes to the Income Tax Act with effect from 1 March 2020. Even though there is a sentence at the bottom that (correctly) states ‘The Amendment does not apply if … you are no longer a resident of South Africa for tax purposes’, this is way at the bottom of the article and people will have read the full article and feel a sense of panic and confusion before coming to the final paragraph, if they make it that far.

So let me assist in clarification — the changes to the Income Tax act only apply if you are a South African TAX RESIDENT. Most expat’s in Dubai (or, in my case, Abu Dhabi), and across the world, will no longer be resident in South Africa for tax purposes. Accordingly, they will NOT be impacted by the changes to the Income Tax Act and no Financial Emigration is required. They will suffer no adverse tax consequences as a result of being a South African expat or citizen under these changes, as long as they are defined, in accordance with the Income Tax Act, as NON-RESIDENT for South African tax purposes.

The Article states ‘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.’. This is a broad sweeping statement that is NOT correct. Again, this only applies if you are a South African TAX RESIDENT and not as a blanket rule to all expat’s or all South African citizens. NO Financial Emigration is required to avoid the changes to the Income Tax Act as the changes will only be applied if you are resident in South Africa for tax purposes. The Income Tax Act is very clear as to who is defined as a South African Tax Resident – most expat’s will not be regarded as resident in South Africa for tax purposes.

The article also states ‘Tim Mertens … says those earning substantially more than the equivalent of R1 million a year are likely to financially emigrate’. This is unlikely to be the case. Financial Emigration is NOT required and most South Africans will not need to undertake this option to avoid changes to the Income Tax Act. The Income Tax Act is very clear as to who is defined as a South African Tax Resident and most expat’s / citizens living abroad will NOT be impacted by the changes to the Income Tax Act from 1 March 2020.

Despite the single sentence at the bottom of the article, I really wish the article would be clearly written in such a way so as to correctly reflect the fact that most South Africans will NOT be impacted by the changes to the Income Tax Act, rather than using the article as a selling point for unnecessary Financial Emigration.

CHARLES ARNESTAD CA(SA), CFA

Correct. There are so many misleading articles on this issue that it is no wonder expats are in a panic.

PREACH!!!

I am surprised MW still publish articles like this when they had one a couple months back with a lot more factually correct details.

My understanding is the issue around tax residence and how it is applied by SARS. seems there is some concern that proving you are not a tax resident will have to be every year and SARS can deny the claim.

The point of this tax is clearly to tax those who are not already paying tax, likely people in the middle east/other low tax countries and therefore even if there is currently loopholes, they will be closed eventually.

Thanks for clarifying, Charles. Maybe MW can pin this answer somewhere to avoid all the current / future confusion?

You are correct on some counts, but missing an important caveat: SARS will consider anyone who is ordinarily resident as being tax resident, and subject to the new expat tax.

As opposed to the physical present test, ordinary residence is not clearly defined in law. Many factors are considered, e.g. intention to return, access to foreign permanent residence/citizenship, property ownership, immediate family still in SA, etc. In your example, most of those people in Dubai have no path to permanent residence or citizenship, and will almost certainly be considered ordinarily resident in SA, and therefore be liable to the expat tax.

It remains to be seen if people will bother being compliant, but the incentive is there for SARS to go after local assets if people don’t pay up.

You are in ” cloud kukuland ” if you think ex pats will pay taxing S A.

Do Not Listen to charlesarnestad,he/she clarifies correctly,but…

the Act will be changed and adjusted just like the Expropriation Bill was changed so many times up to the run-up where we are now…a change to the constitution sect25 to loot all income generating assets.

Financially Emigrate AS SOON AS POSSIBLE as a Citizen and if needed give up your passport.Rather apply for a Visa to stay in South Africa.

There will be a influx of applications to financially emigrate and they will make it impossible to process all the applications..leaving you to pay tax or face…….

I have not had the chance to hear the SONA yet, so pending that outcome, this comment is probably the biggest pile of uneducated verbal rubbish, you can read today.

The day that SA introduces global taxation of its citizens, like they currently do in the USA and two other countries, is the day that there will be a massive rush to change citizenship. Fortunately in today’s day and age, and with the right amount of money, one is not stuck with one passport for life. Those with money have options to change citizenship and will do so if global taxation based on citizenship is introduced in SA. At this stage, however, this is not what the changes to the Income Tax Act in March 2020 has in mind. And @jacobsladder, how many people named Charles have your heard of being a ‘she’?

There are a handful of things Africans do really well, they can run, they can dance and they can tax the living daylights out of you. Even if you live 10,000 km away.

Had a look at this and if you are in a 0% income tax country then I would be sweating a bit and looking at financial emigration but my understanding is that this does not automatically make you a non-resident for tax.

If you are in the UK/AUS/US/EU then it is likely that there is a double tax agreement and if that is the case then you are unlikely to pay any additional tax (unless they change it but that would be wrong).

The only question is how does the exemption work in a calculation. Do they figure out which bracket you are on the full salary or do they work it out on the salary net of the R1m exemption? If it is the later then you likely never have to pay any expat tax.

…..South African have learn’t not to trust SARS or the government

The cost of chasing high earners is near impossible, if money disappears into shell companies
As for the median earners ….there are ways to scurry earnings away and I bet Bitcoin will be one avenue

The thought of money going into the pockets of this corrupt president and his cronies is nauseating

End of comments.

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