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South Africa’s new ‘expat tax’ – 7 things you need to know

The change to section 10(1)(o)(ii) of the Income Tax Act, the foreign income exemption, will become effective from March 2020. South African tax residents working abroad will then be taxed on all their foreign income exceeding R1 million.

The tax, referred to as “expat tax” has created a lot of confusion. As a result, the South African Revenue Service (SARS) released a new Q&A paper outlining the changes and what it means. BusinessTech highlighted the most notable issues in a recent article:

1. Who is a tax resident?

An individual is a resident for tax purposes in South Africa either by way of ordinary residence or by way of physical presence.

2. What is the impact of financial emigration on tax residence?

According to SARS an individual’s tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether or not an individual breaks his or her ordinary residence.

3. Breaking tax residence

According to SARS, “an individual, who is resident by virtue of the physical presence test, ceases to be a resident when that person is physically outside the Republic for a continuous period of at least 330 full days.”

4. Exemption before 1 March 2020

SARS said that exemption under section 10(1)(o)(ii) of the Income Tax Act applies to a South African tax resident who is an employee and renders services outside South Africa on behalf of an employer (South African or foreign) for longer than 183 full days in any 12-month period as well as a continuous period exceeding 60 full days outside South Africa in the same period of 12-months. The exemption does not apply to non-residents.

5. Exemption after 1 March 2020

SARS mentioned that residents will still be required to observe the 183 and 60 full days requirements to qualify for the exemption. Provided the “days” requirements are met, only the first R1 million of foreign employment income earned by a tax resident will qualify for exemption with effect from years of assessment commencing on or after 1 March 2020, it said.

Any foreign employment income earned over and above R1 million will be taxed in South Africa, applying the normal tax tables for that particular year of assessment.

6. What type of income is covered?

SARS also highlighted the amounts that will fall with the scope of the exemption.

7. You could be double taxed

SARS said that double taxation can occur if an individual earns employment income in excess of R1 million and the double tax agreement between South Africa and the foreign country does not provide a sole taxing right to one country. In such an instance, both countries will have a right to tax the income and the portion of the income in excess of R1 million may end up being double-taxed, it said.

Click here to read the BusinessTech article that provides more detail with regards to all aspects.

Click here to read the BusinessTech article “South Africa’s new expat tax and what it means for double taxation”.

Click here to access the Q&A of SARS.

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