South African expatriates should not only understand the newly implemented 2021/2022 tax laws, which aim at taxing their foreign employment income but should also act if they want to avoid its dire consequences. With the 2021/2022 SARS tax eFiling season now open and well underway, this blog aims at providing a thorough understanding and detailed update on South African Tax and tax on foreign employment income, specifically for expats.
INCOME TAX ACT AMENDMENT (2017)
The amendment to the Income Tax Act has been fully enacted and forms part of the Taxation Laws Amendment Bill of 2017. Despite this, many South African expatriates are under the false impression that the law has not been formally amended and will thus not affect them. The fact of the matter is that this new tax regime has been formally passed and therefore, affects all South African expats working abroad who are still South African tax residents. The historic “I will just submit a nil tax return” approach adopted by many South African expats is no longer the appropriate course of action. The 2021/2022 tax season that has recently been opened will be the first time SA expats will be able to see the effects and impact of the new legislation.
THE NEW LEGISLATION STATES:
“There shall be exempt from normal tax any form of remuneration to the extent to which that remuneration does not exceed one million, two hundred and fifty thousand Rand in respect of a year of assessment and is received by or accrues to any employee during any year of assessment by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance… in respect of services rendered outside the Republic by that employee for or on behalf of any employer if that employee was outside the Republic.”
The amendment requires South African tax residents abroad to pay South African tax of up to 45% of their foreign employment income which exceeds the threshold of R1.25 million.
Although the R1.25 million thresholds may seem generous, employment income includes allowances, commissions, bonuses, gratuities and fringe benefits paid to expatriates. In essence, it is not merely your stated basic salary or basic package, but the aggregate of all your worldwide foreign earnings.
The provision of housing, security, and flights, among other things, are often part of the packages offered to South Africans to induce them to work in foreign locations. These benefits can quickly add up to the R1.25m threshold, particularly in the expensive countries in which expatriates often live.
When it comes to expatriate options, there are effectively two schools of thought, excluding the “head in the sand” approach. These options are based on the intention of the South African expatriate.
There is so much misinformation flying around the South African expatriate community at the moment. Service providers perpetuate this using scare tactics and promoting what will benefit them and their bottom line over what is best for expats at large. These two mis-sold solutions are as follows:
First of all, there can never be a one size fits all approach. Financial Emigration (“FE”) requires certain criteria to be met before one can undergo the process.
Financial Emigration (“FE”) was the formal process to note oneself as a non-resident for tax and exchange control purposes in South Africa. The process was intended to ensure that one had met all requirements under the Income Tax Act No.58 of 1962 to ensure that one was a non-resident in accordance with South Africa’s tax residency tests and also ensured compliance with all exchange control regulations for non-residency. A common myth was that Financial Emigration (“FE”) automatically broke your tax residency status. This was not true as Financial Emigration (“FE”) was an active one taken to indicate to SARS their intent to no longer be considered a resident for tax purposes in South Africa.
These processes included obtaining a tax clearance certificate from SARS, a letter of good standing from the SARB and going through a process whereby the account in South Africa was converted into a blocked account during this process. This was a long, cumbersome and expensive exercise with many caveats.
As of 1 March 2021, Financial Emigration (“FE”) is no longer recognized as a method of breaking your tax residency status and has been decommissioned by SARS. Financial Emigration (“FE”) as a solution to negate tax on foreign employment income is therefore ineffective. Sadly, many financial institutions are still advising expats that this is the correct course of action, which is incorrect.
Double Taxation Agreement (“DTA”):
Using a Double Taxation Agreement (“DTA”) will only be suitable for certain individuals. It is noted that relief, in terms of a DTA, will need to be applied for each year. This does not guarantee that all foreign earnings will be excluded from taxation in South Africa by the taxpayer. Even if one is successful in obtaining a DTA residency certificate, one would still be obligated to file a return to SARS.
As DTA agreements vary between South Africa and the country one resides in, one would need to make sure that the contents of the DTA are fit for purpose and that the DTA has been set up correctly. South Africa does not have DTA’s with all countries, so this will only apply to an expat that is living/working in a country that has concluded such an agreement with South Africa.
Even if a DTA exists, this does not mean that a South African expat is fully exempt from tax or submitting a tax return. Each individual fact and circumstance must be assessed individually. There is also a common misunderstanding between obtaining a residency certificate from the host country and being a resident for tax purposes with SARS. Having a residency certificate does not automatically exclude you from being a tax resident of SA.
Before going into the advantages and disadvantages of both, it must be noted that South Africans abroad whatever their decision should absolutely get to know the tax law that currently affects them and will affect them
WHAT IS A DOUBLE TAXATION AGREEMENT?
A DTA is an international treaty signed between two countries, namely South Africa and a foreign jurisdiction. Not every jurisdiction has a DTA in place with South Africa, so only if one has been set up is the opportunity there to make use of it. Importantly, one must all meet the requirements of the DTA to ensure that they can apply it to exempt their foreign earned income from South Africa. This process must be done on an annual basis, whereby one must declare their foreign income in SA and claim exemption.
SARS is likely to then place the taxpayer under verification or audit whereby the taxpayer must prove non-residency according to the tie-breaker test, in Article 4 of the DTA. Though not a requirement, SARS might also require that one obtain a tax residency certificate from the foreign jurisdiction – this certificate generally states that in terms of the DTA that person is a tax resident of the foreign jurisdiction. This certificate would then be supplied to SARS if and when requested. A deemed disposal must also be done in these cases.
ADVANTAGES & DISADVANTAGES
The advantage of applying for a DTA is that you do not need to undergo any formal permanent process in South Africa. It leaves an expat with the opportunity to make decisions on a whim as long as the expat ensures that it still fulfils the requirements of the DTA to have their foreign income not be subject to tax in South Africa.
Undergoing this process is not a complicated matter but can be slightly cumbersome from an administrative point of view. This process also needs to be applied each year.
DTA’s are also a less permanent solution, meaning that a person working abroad can apply for the DTA and may be fully exempt from paying taxes in South Africa on their foreign income and will not have to reverse any formal process if they do return to South Africa.
A notable concern around DTA’s is they are in fact agreements between countries. Should relations change between the countries or should there be amendments to certain regulations or terms, the DTA may become ineffective.
Applying a DTA to your situation is a yearly process, which means that every year you will need to “convince” SARS that, for that particular year of assessment, you are considered as a non-tax resident of South Africa in terms of the specific and relevant DTA. This is a disadvantage because it can become an administrative nightmare and having to prove to SARS your tax residency status for that particular year of assessment on a yearly basis may be a battle.
Furthermore, to prove you fit the bill in terms of a DTA, SARS often requires a tax residency certificate to be submitted to them from the country you are paying taxes in. This may seem simple enough, however, this is often not the case.
For instance, in the UAE, obtaining such a certificate can mean taking two full days of your time to go through the process, or finding a service provider that will do this for you, and there can also be very stringent requirements in a country to obtain such a certificate.
Even more worrying is that certain countries don’t have a formal process in place to obtain or even supply such a certificate. In certain countries, service providers are charging a hefty fee and you will need to obtain this certificate every year. Thus, the costs, in the long run, could be far higher than that of Financial Emigration (“FE”).
DTA’s are specific on the requirements one needs to meet to be considered a tax resident of a country other than South Africa. You, therefore, need to ensure that you take careful notice of those requirements and ensure that you meet them year to year.
SARS NEW REGULATIONS REGARDING ACCESS TO RETIREMENT/PENSION FUNDS FOR EXPATS
Historically, South Africans were able to access their retirement annuities or pension savings when they turn 55 years of age or older or when they had broken their tax residency status with SARS, which would have consisted of obtaining a tax clearance certificate from SARS as well as approval from the SA Reserve Bank.
The National Treasury announced that they would be phasing out the SARB process of financial emigration as of 1 March 2021. Due to these amendments, the ability of individuals being able to withdraw their retirement annuity upon emigration was reviewed and Treasury had confirmed that a 3-year lock-in on retirement savings for South African expats will be implemented from 1 March 2021.
In the 2021 budget speech, it was announced that retirement savings could be withdrawn, prior to retirement, after 3 years from the date from which the break of your tax residency status was formalized. Consequently, from the effective date of the proposed amendments, one will need to be able to prove under either of the two South African residency tests that they are non-resident for a period of 3 consecutive years, post 1 March 2021, before they will be allowed to withdraw these funds from South Africa. Expats wishing to have broken their financial ties with SARS would have needed to do so before 1 March 2021 to avoid a 3-year lock-in period.
ORDINARILY RESIDENT TEST
The question of whether a natural person is ordinarily resident in a country is one of fact and each case must be decided on its own merits, taking into consideration principles established by case law. It is not possible to lay down hard and fast rules. When filing whether a natural person is ordinarily resident in the Republic, the following factors will be taken into consideration:
- An intention to be ordinarily resident in the Republic
- The natural person’s most fixed and settled place of residence
- The natural person’s habitual abode, that is, the place where that person stays most often, and his or her present habits and mode of life
- The place of business and personal interests of the natural person and his or her family
- Employment and economic factors
- The status of the individual in the Republic and in other countries, for example, whether he or she is an immigrant and what the work permit periods and conditions are
- The location of the natural person’s personal belongings
- The natural person’s nationality
- Family and social relations (for example, schools, places of worship and sports or social clubs)
- Political, cultural or other activities
- That natural person’s application for permanent residence or citizenship
- Periods abroad, the purpose and nature of visits
- Frequency of and reasons for visits
The above list is not intended to be exhaustive and is merely a guideline.
PHYSICAL PRESENCE TEST
The requirements refer to the number of days that a natural person must actually be present in South Africa, during a year of assessment and also during the five years of assessment preceding the year of assessment under consideration.
These requirements are that the person must be physically present in the Republic for a period or periods exceeding – 91 days in aggregate during the year of assessment under consideration; and 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and 915 days in aggregate during the five preceding years of assessment.
A natural person who complies with all the requirements referred to above is a resident of the Republic, for tax purposes, for the year under consideration.
In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident from the day on which that individual ceased to be physically present.
What are the implications of breaking my tax residency status?
When you break your tax residency status with SARS, capital gains tax will be triggered. This is because at the point you break your formal tax residency, you are deemed to have disposed of all your assets in South Africa other than immovable property (a house is an example of an immovable asset). This means that there should be sufficient liquidity available to cater for capital gains tax obligations that may arise when you break your tax residency status. An example of assets that you will be liable to pay capital gains tax on could be:
3) Investments such as unit trust investments (but not preservation funds, retirement annuities or any retirement savings)
4) Kruger coins or gold
5) Any other assets that are not considered immovable property
THE EXEMPTION AS OF 1 MARCH 2021 AND WHAT IT MEANS IN TERMS OF SECTION 10(1)(O)(ii)
Residents will still be required to observe the 183 and 60 full days’ requirements in order to qualify for the exemption. Provided the “days” requirements are met, only the first R1.25 million of foreign employment income earned by a tax resident will qualify for exemption with effect from years of assessment commencing on or 1st March 2021.
Any foreign employment income earned over and above R1.25 million will be taxed in South Africa, applying the normal tax tables for that particular year of assessment.
How do I negate paying tax on foreign employment income?
Provided you meet one of the criteria above, you would need to make a formal application to SARS to have your tax residency status changed to that of a non-tax resident. This would include submission of documentation as well as a formal submission to SARS as a non-tax resident. From this point onwards, once your status has been changed to that of a non-tax resident and your first return submitted as a non-tax resident, you will be considered a non-tax resident of South Africa going forward and not be required to submit a tax return to SARS on any earnings that are generated outside of South Africa.
It must be noted that both non-tax residents, as well as tax residents, will be liable to pay tax in South Africa to SARS on all income generated and derived in South Africa. An example of this would be rental income from a property in South Africa.
Often South Africans abroad fall in a grey area being arguably tax residents in both South Africa and the country they have emigrated to, which the DTA attempts to make the final decision on. However, falling into this grey area means that it could make it far more complicated to prove to SARS that you are a non-tax resident of South Africa.
The more effective and less administratively cumbersome process in mitigating tax on foreign employment income is to make a formal application to SARS to have your tax residency status changed to that of a non-tax resident (provided you meet certain criteria previously mentioned).
It is imperative to understand the options that are available and what the implications of those options would be. It would be highly recommended to obtain a legal tax opinion once one has established what one’s true intentions are and then proceed to examine the cost to benefit of those options. A tax opinion is a legal instrument in terms of the Tax Administration Act which provides protection to the taxpayer against SARS’ penalties and interest if the taxpayer acted according to the opinion. A Tax Opinion can only be issued by a SARS-registered tax practitioner.