Many South Africans are working abroad, either for a short period of time or with the goal of eventually immigrating. If that’s you, or you’re considering taking up foreign employment in the near future, you need to know about the new tax changes that are going to affect you.
Before we get into the changes, let’s look at how foreign employment income was treated for South African tax purposes up till now.
Tax on Foreign Employment Income: Background
When you work for an employer in a foreign country, you pay taxes on your salary to that country’s revenue service. But, according to South African tax laws, all South African residents need to pay tax on their worldwide income. To avoid double taxation – paying tax on the same income in both South Africa and the foreign country – an exemption was extended to us.
This exemption allows for your income to be exempt from tax in South Africa, in other words, you only pay taxation in the foreign country. But, in order to qualify for this exemption, the following criteria apply:
- You need to work for an employer and not as a freelancer or on a consulting basis. The employer can be a foreign entity or a South African entity operating in a foreign country.
- You must be outside of the country for a period of at least 183 full days during any 12-month period. In other words, the 183 days doesn’t need to fall within the same tax year.
- You also need to be outside the country for a continuous period of at least 60 full days during that 12-month period.
Up until now, it didn’t matter if and how much tax you paid on your employment income in the foreign country. For instance, if you work in a zero-tax country like Dubai or one of the African countries, you didn’t pay any taxes on your employment income.
That’s all about to change now.
The New Tax Amendment on Foreign Employment Income
According to the National Treasury, this legislation is excessively generous and unfair towards other South African taxpayers, since not all SA residents are treated the same.
The exemption will now be limited as follows:
- If you earn foreign employment income, the first R1 million of this income will still be exempt from income tax in South Africa. (The criteria mentioned above still applies in order to receive this exemption.)
- Any income above R1 million will be subject to personal taxation in South Africa. For instance, if your income for the tax year is R1.1 million, you will pay tax on R100,000 in South Africa according to the personal income tax sliding scales, which starts at 18%.
- If there is a double-taxation agreement in place between South Africa and the foreign country, that agreement will still apply.
- If there isn’t a double-taxation agreement in place, you may still apply for the section 6quat exemption if you’ve paid income tax in the foreign country. How this works is the taxes you’ve already paid in the foreign country are deducted from the income tax you would have paid in South Africa. If you’ve paid more tax in the foreign country, you won’t pay any additional taxes in South Africa. However, if you paid less, you’ll need to pay the difference over to SARS.
This amendment will come into effect on 1 March 2020, and the first taxation period this amendment will affect is the 2021 tax period (1 March 2020 – 28 February 2021).
Who Will Be Affected by This Tax Amendment?
Low and middle-income earners won’t be affected by this amendment. Similarly, high-income earners who work in a country with high personal income tax rates will also not be affected.
However, high-income earners – earning more than R1 million – who are working in countries with no or low tax rates will feel the burden.
Should I Submit a Tax Return?
Whether you pay taxes on your foreign income in South Africa or not, you still have to submit your annual tax return as long as you’re a South African tax resident.
According to the South African tax system, as with many other countries, we are taxed on our worldwide income. Even though exemption may apply to you, it doesn’t change the fact that you need to submit your returns.
If you are working in a foreign country and you’ve neglected to submit your annual tax returns for past years, we urge you to get these up to date sooner than later. If not, SARS will reward you with unwanted admin penalties. These penalties are calculated according to your income and ranges from R250 up to R16,000 per month for as long as your returns are outstanding.
Time to Give up My South African Tax Resident Status?
If you are immigrating from South Africa and you’re sure that you won’t return, now may be the time to consider whether ceasing to be an SA tax resident is an option for you or not. There are many South Africans who left the country without considering their tax obligations in South Africa. If that’s you, it may be time to formalise your tax residency status.
But, don’t take a step like this lightly. When you apply to give up your South African tax residency status, you will need to pay capital gains tax (CGT) on all your assets worldwide, based on the market value of those assets on the date you immigrate. It is called a deemed disposal, and even though you didn’t sell your assets, the change in residency status will trigger CGT. (There are certain exclusions, like immovable property that you still own in South Africa. Once you sell that property – even if it’s years later – you’ll pay CGT on that property in South Africa.)
Also, remember that you have to be a tax resident in some country. When you cease to be a tax resident in South Africa, you need to become a tax resident in another country. So don’t try this if you’re going to travel the world and you just want to avoid paying tax anywhere.
Ceasing to be an SA tax resident is a complicated process, so make sure you come to talk to us so that we can help you to follow the right procedures.
The last thing you want is to enjoy your new life abroad, only to get an unpleasant surprise bill from SARS that you didn’t expect.
Whether you’re working abroad but planning to remain a South African resident, or you want to immigrate and need help to get your tax affairs in order, get in touch with us for help.