To date, South African tax residents who worked oversees for more than 183 days (of which 60 consecutive) were exempt from paying income tax on their foreign earnings. But within the next year that is set to change.
A second look at this exemption was suggested in the Budget Review of 2019 and since then the term "expat tax" has been buzzing among South Africans near and far. Although this amendment could have serious implications for some, many expatriates will be relieved to know that there are a few breathing spaces within this legislation.
Here are a few things to take note of with regards to expat tax:
1. The changes are not effective yet
The first bit of good news is that expat tax is not effective yet and will only be from 1 March 2020, according to Treasury. The changes to the foreign employment income tax exemption was proposed in the Budget Review of 2019 for the upcoming legislative cycle and will therefore only be actioned in 2020.
2. Expat tax is strictly part of Income Tax legislation
Expat tax will target earnings only as it's an amendment to the Income Tax Act of 1962. Should your company provide you with benefits such as accommodation, a company car or other add-ons, these benefits will unfortunately be taken into account when calculating your tax liability.
3. You are exempt from expat tax for an annual income of below R1 million
This might come as a relief to many young people who are working jobs abroad, but you are exempt from being taxed on your foreign income if it's less than R1 million. "South African residents who spend more than 183 days in employment outside the country will be subject to South African taxation on any foreign employment income that exceeds R1 million," Treasury says.
4. You won't pay double tax thanks to Double Tax Agreements (DTAS)
The purpose of Double Tax Agreements between two countries is to eliminate double taxation. This is good news because it ensures that South Africans who earn more than R 1 million from work abroad will still only pay a maximum tax rate of 45% - as they would have had they lived in SA.
SARS will only have the rights to tax your income to the extent that it was not taxed by the other country's tax administration. For example, if your effective income tax rate would have been 45% in South Africa and you're taxed at 25% abroad, SARS can only tax your income at the remaining 20% to allow for your total effective income tax rate to be 45%.
5. Financial emigration is an option for expats, at a cost
If the above-mentioned exemptions are too bitter a pill to swallow, there's always the option of financial emigration. Financial emigration requires the submission of a formal application to SARS and the SARB advising them of your intention to formally emigrate. Gavin Butchart, Financial Director of Brenthurst Wealth Management, explains that once your tax residency status has been changed to non-resident for tax purpose, you should not be taxed on your offshore income.
"However, you may become liable for capital gains tax (CGT) on the day that you stop being a resident," Butchart warns. "The Income Tax Act treats this as a deemed disposal of all assets and the only exception to this rule is immovable property." Changing your tax residency does not influence your citizenship.
Financial emigration is an option but not the only option and needs to be reviewed on a case by case basis. All the requirements in terms of this option must be kept once the decision has been made.
In all cases it is worth seeking the advice of a qualified tax practitioner with experience in this field to assist in determining the tax cost of emigration.