With the recent announcement that South Africa will be moving to Level 1 and that international borders will start opening up, many South Africans heaved a great sigh of relief. Although life is by no means back to normal, this development does start creating possibilities for international travel and tourism again. Also, from a tax perspective, it could provide some relief in respect of numerous tax issues caused by lockdown.
The nationwide lockdown and travel restrictions that were imposed in March interrupted many people's travel and work plans. At the time, it was not anticipated that the borders would be closed for more than half a year - but three weeks grew into five weeks, and only now, more than six months later, is international travel becoming possible again.
Many individuals are required to travel internationally for work or business purposes. While some individuals were permitted to enter and leave South Africa, they were the exception rather than the rule. For the rest of this group, the six plus month travel ban not only impacted on their ability to earn an income, but also had negative tax implications both for individuals, and potentially also for companies. This newsflash focuses on individuals.
Foreign earnings exemption - individuals
A large number of South Africans earn a living overseas. While many of them return home on a regular basis, they generally spend sufficient time overseas to qualify for the foreign earnings exemption in section 10(1)(o)(ii) of the Income Tax Act, 58 of 1962 (ITA). When the lockdown was originally announced in March 2020, they had to decide whether they were returning home for the lockdown, or whether they would stay overseas.
In terms of the foreign earnings exemption, remuneration earned for services rendered will be exempt if the South African tax resident was working offshore for more than 183 days during any period of 12 months and for a continuous period of more than 60 days during that 12-month period. Due to a recent amendment, the exemption applies up to a maximum amount of ZAR1,25 million per year.
Individuals who continued working offshore during this period, should not have any problem qualifying for the foreign earnings exemption. However, individuals who returned to South Africa during the lockdown period, either did not earn an income during this period, or would most likely have been unable to comply with the requirements of section 10(1)(o)(ii).
When considering the potential application of section 10(1)(o)(ii), it is important to keep in mind that the 'days count' in the section refers to 'any period' of 12 months, not to a calendar year or a tax year. In the ordinary course, these 12-month periods would run consecutively. However, this is not a requirement of the section and it should thus be possible to start a new 12-month period once the individual starts working overseas again.
Employees who did not receive remuneration during the period of the lockdown would not need to rely on the foreign earnings exemption for the lockdown period but can start a new 12-month period once they start working overseas again.
However, where an individual continued working for a foreign employer, but did so remotely from South Africa, it is highly unlikely that he/she would be able to rely on the foreign earnings exemption in respect of the income so earned. While this may potentially be possible, it would depend on the time spent outside South Africa before and after the lockdown, and on when his/her specific 12-month cycle starts.
An individual who earned income from a foreign employer while working in South Africa, could suffer double tax if the individual is also subject to income tax in the foreign tax country. A double tax agreement (DTA) would not provide relief in such scenario. Usually, where a South African individual paid tax in a foreign country for services rendered offshore, he/she will be able to claim a foreign tax credit in terms of section 6quat of the ITA.
However, he/she will be unable to claim a foreign tax credit in this instance, as the income earned while working in South Africa will most likely be regarded as local income, thus not qualifying for a foreign tax credit. While the individual may be able to claim a deduction against income for foreign taxes paid, this would only provide partial relief.
Revenue authorities in various countries have announced special relief in respect of cross-border workers in the context of their respective lockdown rules. Many countries have also entered into mutual agreements in respect of income earned by cross-border workers. For example, Belgium and France have agreed that days spent working from home due to lockdown measures, will be deemed to be spent in the state where the workers would ordinarily have carried out such activities.
However, South Africa has not yet announced any relief in this regard. In fact, at a recent meeting of Parliament's Standing Committee on Finance, it did not appear as if National Treasury had any plans to announce special relief measures related to these circumstances.
With the end of the travel ban in sight, and with no indication that the rules regarding the foreign earnings exemption will be relaxed, it is important both for individuals and for South African employers whose employees may rely on the foreign earnings exemption, to carefully assess their current positions and how the possibility of travel in the near future could provide some relief.
Tax residence - individuals
A non-resident could become tax resident in South Africa if he/she became ordinarily resident, or in terms of the physical presence test. Ordinary residence is based on the subjective intention of the taxpayer, but the physical presence test is an objective test based on the number of days spent in South Africa over a six-year period. A non-resident could become tax resident in terms of this test:
- if he/she is present in South Africa for more than 91 days in aggregate during the current tax year;
- if he/she was physically present in South Africa for more than 91 days in each of the preceding five years; and
- if he/she was physically present in South Africa for an aggregate period exceeding 915 days during the preceding five tax years.
However, this is subject thereto that a person will not be resident in South Africa if he/she is deemed to be exclusively a resident of another state in terms of a DTA.
Non-residents who have been unable to leave South Africa since March may be concerned about becoming tax resident as a result of the lockdown rules.
As ordinary residence is based on the intention of the taxpayer, and depending on the personal circumstances of an individual, it should be possible for a person not to become ordinarily resident in South Africa, even if he/she was unable to leave South Africa due to the travel ban.
However, what is the position regarding an individual in his/her sixth year of the physical presence test, who had to spend more than 91 days in South Africa due to the travel ban? As the physical presence test does not consider the intention of the parties or any special circumstances, one cannot disregard the number of days spent in South Africa even if it was due to circumstances beyond the control of the individual.
That said, if the individual is tax resident in a country which has concluded a DTA with South Africa, and if such DTA deems the individual to be exclusively resident in the other jurisdiction, the individual would not become tax resident in South Africa.
Various other countries have announced relaxations in respect of residency tests, if a person is forced to be present in their country as a result of extraordinary circumstances. However, no such announcement has been made by National Treasury and there is also no indication that such an announcement could be expected in the near future.
Accordingly, non-residents who had to stay in South Africa during the lockdown must carefully assess their current positions and must consider how the lifting of the travel ban could be used to their advantage in the context of the application of the residency tests.
SEPTEMBER 18, 2020
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.