Many South Africans are deeply concerned about their future of working abroad when the Income Tax Act amendment to the exemption of foreign remuneration comes into force. Currently, all income earned abroad is exempt from South African tax if the person meets certain criteria. From 1 March 2020 only R1 million will be exempt, and earnings above that will be taxed at a possible rate of 45%.
Jonty Leon, legal manager at Financial Emigration, a division of Tax Consulting SA, says the concern stems from the fact that many believe they will not be able to afford the additional tax burden. “The panic lies in trying to formalise their tax non-residency status so that South Africa cannot tax them on their foreign income above the R1 million exemption.”
Shohana Mohan, Head of Global Employment and Expatriate Tax Advisory at TaxAuditor Solutions, says there is no need for panic. National Treasury has provided employers and employees a window period of three years from the promulgation of the amended legislation to consider their options, thus until 1 March 2020.
Mohan, a member of the personal tax workgroup of the South African Institute of Tax Professionals (SAIT), believes the panic can partially be ascribed to a lack of understanding of the current and future legislation. She says there are two issues regarding the impact of the amended legislation to be considered. The one relates to those who are still considered tax residents of SA, and the other to those who ceased to be tax residents due to their specific circumstances. The issue of tax residency goes hand in hand with the impact of the amended foreign remuneration exemption. “There are pockets of expats who have lived abroad for several years, but who may not have regularised their tax affairs, nor have they broken their tax residency in SA. This contributes to the panic.” The implication is that these people are deemed to have sold their worldwide assets, excluding property and financial assets such as retirement annuities in SA, triggering capital gains tax, also referred to as the exit charge.
Leon says the Income Tax Act provides for two residency tests – ordinarily resident and physical presence. The ordinarily resident test is the more important one of the two because it overrides the requirements of the physical presence test. To break South African tax residency, financial emigration is required – a formal, legal process to have you noted as being a non-tax resident on the systems of the South African Revenue Service and the South African Reserve Bank.
Another way of becoming a non-tax resident is by applying for the double tax agreement in the country where you are working. In every agreement, there is a tie-breaker clause which determines which country has the right to tax. “This is normally the route to follow when you are on a longer-term contract and you intend coming back to South Africa. It is, however, an annual process and it could be costly to obtain a tax residency certificate every year.”
Leon says when people have seized to be tax resident in SA, but has never formalised it, the process can be backdated to when they left the country. “This can become quite complicated, depending on how you have filed your tax returns since you left. If you have been filing your tax returns showing your worldwide income, you have indicated that you are a tax resident. We are then unable to backdate the financial emigration process.” However, if you have submitted only South African sourced income in your tax returns, or if you filed a zero return, or no return (in which case you will be non-compliant), your emigration can be backdated, and you can become fully compliant.
A South African earning less than R1 million generally don’t need to worry about being taxed in SA. “However, I would advise people to break their tax residency if they are working abroad and have no intention of coming back, even if they earn less than R1 million a year. It is far simpler and clears up everything.”
Leon says if people plan to return, then financial emigration is not the relief for you. “Make sure you meet the requirements to qualify for the exemption and make use of it.”
