If you are a South African working abroad, you have probably already learned that tax compliance can get complicated. Between tax residency rules, foreign income exemptions, and annual return submissions, one small error can make a big difference.
We have seen a recurring issue that affects hundreds of South Africans working overseas during the 2025 tax season: incorrect IRP5 source codes. This may sound like a minor technicality, but it often means the difference between receiving a rightful refund or paying unnecessary tax in South Africa.
Understanding the IRP5 and source codes
Your IRP5 is a summary of your earnings, deductions, and taxes withheld by your employer during the tax year. Every type of income on your IRP5 has a source code, which tells the South African Revenue Service what kind of income it is. Here is where the confusion begins.
Source code 3601 is for local taxable income, used when you earn income for services rendered in South Africa. This represents standard local employment income subject to normal South African tax.
Source code 3651 is for foreign taxable income, applicable to South African tax residents who earn remuneration for services rendered outside South Africa. This income is potentially eligible for the section 10(1)(o)(ii) exemption, commonly known as the foreign employment income exemption.
Source code 3652 is for foreign non-taxable income, used when non-residents earn remuneration from a South African employer for services rendered outside South Africa. Such income is typically not subject to South African tax under the source-based taxation rules applicable to non-residents.
These codes matter because SARS uses them to determine whether your income qualifies for tax exemptions and whether you are due for a refund.
Why this is important
The consequences of using incorrect source codes are significant and can cost you substantial amounts of money. Let’s look at two common examples to illustrate the problem.
Example 1: South African resident working abroad
Thandi is a South African tax resident working in the United Arab Emirates for more than 183 days a year. Her employer pays her from South Africa, but her IRP5 shows income under 3601 (local income) instead of 3651 (foreign taxable income). When she files her tax return, SARS sees her income as “local” and will not apply the foreign income exemption. She is taxed in South Africa even though she qualifies for the exemption, which allows up to R1.25 million in foreign employment income to be exempt from South African tax. The result could be a tax liability of several hundred thousand rand on income that should be exempt.
If her IRP5 had correctly reflected 3651, SARS would have recognised the income as foreign and allowed her to claim her exemption, potentially leading to a substantial refund.
Example 2: Non-resident working for a South African employer
John emigrated years ago and is no longer a South African tax resident. He now works abroad for a South African company. His employer issues an IRP5 under 3601, showing local taxable income. But because John is a non-resident, his income should be reported under 3652 (foreign non-taxable income). As a non-resident, he should be taxed only on South African-sourced income, meaning foreign services should not be taxed at all. This incorrect coding causes SARS to treat his income as taxable in South Africa, and a refund upon annual return submission will not be possible.
Why employers often get it wrong
Most employers and payroll administrators use automated payroll software that defaults to local income codes such as 3601. Unfortunately, these systems are not always configured to reflect the complexities of expatriate employment. Many employers are unaware that different source codes exist for foreign income, or they assume that because payment is processed in South Africa and the employee remains on the South African payroll, the income should be coded as local.
Other times, employers mistakenly believe SARS does not allow resubmissions once the original IRP5 has been filed, or they claim their payroll system does not allow for the resubmission. Although some payroll systems may require manual intervention or additional configuration, this is simply a technical limitation of the chosen software, not a legal or regulatory impossibility. Employers have a statutory duty under the Income Tax Act and the Fourth Schedule to report accurate information to SARS, and technical convenience cannot override compliance obligations.
The correct approach for employers
Employers can and should ensure that income for expatriate employees is reported using the correct source codes. The process is straightforward once you understand what is required.
First, identify the employee’s tax residency status. Is the employee a South African tax resident or a non-resident? This determines which code applies. Then determine where the services are being rendered. The source of income is based on where work is performed, not where payment is processed or where the employer is located.
For a resident working abroad, use source code 3651 for foreign taxable income. For a non-resident working for a South African employer on foreign services, use source code 3652 for foreign non-taxable income.
If the wrong code was used on an already-filed IRP5, employers can and must resubmit a corrected certificate. SARS allows employers to correct and resubmit IRP5 certificates through the payroll system or via e@syFile. The corrected IRP5 should include the updated source code and reflect the same PAYE totals if applicable. The process involves completing a revised IRP5 with the correct source codes, submitting the correction through the employer’s e@syFile platform, and indicating that it is a corrected certificate replacing the original.
Setting up systems correctly from the start prevents these issues entirely. Payroll systems should be configured to accommodate different source codes based on work location. HR and payroll staff need training on the differences between source codes and when each applies. This is not advanced tax knowledge; it is basic compliance that every employer with international employees should understand. Implement processes to identify expatriate employees and track service location throughout the year, not only at IRP5 time.
Before issuing IRP5s each year, conduct an annual review of all employees working abroad or with non-resident status. When uncertain about classification, consult with tax advisers before issuing certificates.
The employee’s role
If you are an expat, the best time to address source code issues is before they become problems. Before you start working abroad, notify your employer in writing of your tax residency status and where services will be rendered. Do not assume they will automatically know or make the change. Request written confirmation that the correct source code will be used on your IRP5.
During the tax year, stay vigilant. Monitor your monthly payslips to verify that foreign income is being appropriately identified. Maintain detailed records of days worked outside South Africa, including travel itineraries, boarding passes, accommodation proof abroad, and any income earned for services rendered in and outside South Africa. These records will be invaluable if disputes arise later.
If you believe your IRP5 is wrong, check your source code first. You will find it in the income section of your IRP5, showing whether it is 3601, 3651, or 3652. If it is incorrect, ask your employer to amend it immediately. Provide them with a written explanation that includes specific reference to the incorrect code, the correct code that should be used, and supporting evidence of where services were rendered. Keep supporting documents ready, such as your employment contract, proof of foreign days worked, and non-residency confirmation where applicable.
If your employer refuses or claims they cannot make changes, escalate appropriately. Contact HR management or the finance director rather than just payroll staff who may not understand the tax implications. Reference the employer’s legal obligations under tax legislation in your communication. Consider involving your tax practitioner or attorney, particularly if the employer continues to refuse. A letter from a tax professional often carries more weight and demonstrates you are serious about the matter.
Once you have the amended IRP5, file your return correctly with the corrected certificate uploaded. SARS will process your refund or exemption accurately.
Why it’s worth getting right
Source codes are not optional preferences or administrative conveniences. They reflect the legal nature of the income and determine your tax liability. The difference between using the correct and incorrect code can easily be R300 000 or more in tax saved or unnecessary tax paid. Employer co-operation is essential, which is why early communication prevents year-end disputes that are stressful and time-consuming for everyone involved.
Documentation is critical throughout the process. Without comprehensive records of work location and days abroad, proving your case becomes nearly impossible. Timing also matters significantly. Address source code issues immediately when identified rather than waiting until filing season when pressure is high and options are limited.
Final thoughts
The correct IRP5 source codes are a small but critical piece of the tax compliance puzzle for South Africans working abroad. Whether you are a tax resident claiming the foreign income exemption or a non-resident earning from South Africa, getting this right means fewer headaches and more money in your pocket.
Employers must recognise their obligation to report income accurately, regardless of payroll system limitations or administrative convenience. Expatriates must be proactive in communicating their circumstances and monitoring their tax documentation throughout the year, not only when problems arise. The rules are clear, the obligations are established, and the financial consequences of getting it wrong are substantial.
This article was written by Reinert van Rensburg, tax attorney and tax practitioner, and Jonty Leon, managing partner and tax practitioner at Leap Group.
Disclaimer: The views expressed in this article are those of the writers and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for obtaining professional tax advice.
