South Africa employs a residence-based tax system, entailing that residents are taxed on their worldwide income, subject to certain exclusions. Conversely, non-residents are taxed on their income from a South African source.
Regulations relating to tax, particularly for South Africans residing and working abroad have changed and it's therefore fundamentally pertinent that one is conscious of the expectation to pay tax on income earned outside of the Republic. As of 1 March 2020, South African tax residents living and working abroad are required to pay tax, at the relevant tax resident's marginal tax rate, on their foreign employment income, if earning above R1.25 million per year – although they may qualify for some tax relief. Section 10(1)(O)(ii) of the Income Tax Act offers certain conditions for exempting income tax on income earned (or at least a portion of it) for services rendered outside of South Africa. Foreign employment income earned by a South African will no longer be fully exempt. The exemption currently is capped at R 1.25 million per annum from 1 March 2020.
A comprehensive understanding of these changes requires an assessment of the existing legislation. Under current tax law (applicable up to 28 February 2020), South African tax residents working abroad are entitled to a tax exemption from income earned abroad, provided that they're physically outside of South Africa for 183 days in aggregate during any 12-month period and, during that 183-day period outside South African borders, at least 60 days must be continuously spent outside SA. [* For the 2020 and 2021 years of assessment, this requirement has been reduced from 183 days to 117 days.] Periods outside South Africa where no remuneration was earned fall outside the ambit of section 10(1)(O)(ii).
Up until February 2020, where both these requirements are met, South African tax residents can claim a tax exemption from income connected with employment services rendered outside the Republic. The crux of this exemption hinges squarely on the notion of employment, as the current and impending law only applies where the foreign remuneration is earned within an employment context, regardless of whether the employment relationship is with a South African or foreign employer. Suffice to note that, not all remuneration qualifies for a section 10 exemption. An individual who is in an independent contractor relationship is disqualified from the applicable tax exemption. Similarly, amounts payable by an employer to an employee, but not related to services rendered are not included in the scope of section 10(1)(O)(ii).
The taxpayer is still required to declare the foreign-sourced income in a South African tax return and claim the relevant tax exemption. This is because South African tax residents must declare all their income on a worldwide basis, even though some of that income may be tax exempt. A common mistaken is that individuals earning foreign income tend to exclude the income from their tax return or completely neglect to submit tax returns at all, which is an incorrect application of the law.
A person will be a 'resident' for tax purposes in South Africa, where that person is either ordinarily resident or physically present over a set number of days within a five-year period unless a relevant double tax agreement regards the person to be exclusively a resident of another jurisdiction. However, as already alluded these changes only apply to a South African tax 'resident' working abroad and earning foreign income. The changes become non-consequential when one ceases being a South African tax resident and not through formal financial emigration. One's tax residency is not automatically halted when they financially emigrate. Thus, getting approval from the South African Reserve Bank (SARB) to financially emigrate doesn't automatically mean that you will no longer be considered a tax resident. However, the cessation of residency triggers an 'exit charge' under section 9H of the Income Tax Act, which will be explored further in our next article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.