‘EXPAT TAX’: YOUR

TOP 5 QUESTIONS

1. How will the existing tax laws be amended?

With effect from 1 March 2020, Section 10(1)(o)(ii) of the Income Tax Act 58 of 1962 (ITA) has been amended to allow only the first R1.25 million of foreign remuneration to be exempt from tax in South Africa. This effectively means that all South African tax residents working abroad are now subject to tax in South Africa on any foreign employment income above the R1.25 million threshold. If tax has been paid on these earnings in the foreign host country, South Africa will allow a tax credit, limited to the amount of local tax payable on the foreign earnings.

2. Who will be affected by the new laws?

There’s been much media hype around the tax law amendments, with headlines often referring to ‘SA expats working abroad’. It’s important to note that the change in legislation won’t necessarily impact all South Africans working abroad. In broad terms, it will only be applicable if you’re still a South African tax resident, and:

• receive remuneration for employment services rendered outside South Africa, including salary, share options, leave pay and wage overtime pay
• are outside South Africa for more than 183 days in aggregate during a 12-month period, and for a continuous period exceeding 60 full days during that 12-month period
• are employed by a resident or non-resident employer.

If this applies to you, it may be beneficial to consider the cessation of your South African tax residency, or rely on an available double tax treaty. See our article on the implications for estate planning if you decide to cease your South African tax residency.

It’s crucial to consult a fiduciary and tax expert, however, as your current circumstances might result in you falling outside the scope of the new Section 10(1)(o)(ii), for example, if you’re:

• an officer or a crew member of a ship (not an independent contractor or self-employed person), engaged in the transportation of goods and services for reward during a year of assessment and
• outside South Africa for a period or periods exceeding 183 days on aggregate during a year of assessment.

3. If I cease my tax residency, will the exit charge apply only to my SA assets?

There is a misperception that if you cease to be a tax resident, the exit charge will apply only to your South African assets and not to those held abroad. This can’t be further from the truth. As a local tax resident you’re subject to tax on a worldwide basis. When you cease to be a South African tax resident, you’ll therefore trigger an exit charge on your worldwide assets, and not only your local assets.

The Income Tax Act 58 of 1962 includes a provision under Section 9H that should a person cease their residency, they must be treated as having disposed of all their worldwide assets on the day immediately before cessation. A note of caution: the provision states that the market value to be used is not the value on the day you cease your residency, but the value on the preceding day.

4. Are there any assets excluded from the exit charge when I cease to be a tax resident?

The exit charge will be applicable on your worldwide assets – excluding any fixed property you own in South Africa. However, as a non-tax resident, you’ll still be liable for capital gains tax when you sell the property.

5. Will I be taxed at the 45% marginal tax rate?

If your foreign employment income is equal to or greater than R1 577 301 for the tax year, it doesn’t necessarily mean you’ll be taxed at 45%. It’s important to remember that you’re taxed on a worldwide basis and not only on your foreign employment income. Once you’ve included all your income in your tax return (including foreign employment income and interest) the South African Revenue Service (SARS) will first apply the relevant exemptions. It will then deduct any qualifying deductions and add any taxable capital gains. Only then you will derive at your taxable income.

For example, on an income of R1 577 301 that is derived solely from foreign employment, after the R1.25 million exemption – and assuming you have no deductions and taxable capital gains – only R327 301 will be taxable income. If your employer deducted the relevant employees’ tax in the foreign jurisdiction, any taxes levied on the R327 301 portion may be used as a credit to ensure you’re not double taxed. Also, as a tax resident, you’re still entitled to a primary rebate.

The idea that you’ll be taxed at the marginal rate of 45% on your total foreign employment income is therefore incorrect. You’ll have to take into account the relevant exemptions as well as deductions, not forgetting your rebates and credits for taxes already paid abroad.

It’s crucial that you fully understand how the tax law amendments could impact you – uninformed decisions may have significant financial consequences for both you and your family. If you’d like further information or advice, contact Stanley Broun on 011 778 6648 or stanley@privatewealth.sanlam.co.za.