Residence-based tax system
From 1 March 2001, South Africa moved from a source-based to a residence-based tax system for individuals. This meant that tax residents would be subject to tax on worldwide income (excluding certain exemptions or exclusions) and non-residents would be subject to tax on income from a source within South Africa. For more information on the tax treatment of non-residents in South Africa, please refer to the Non-Residents webpage.
Who is a tax resident?
An individual is a resident for tax purposes in South Africa either by way of ordinarily residence or by way of physical presence. The concept of “ordinarily residence” is not clearly defined and the determination of whether or not an individual is an ordinarily resident for tax purposes must be done on a case-by-case basis. A number of factors must be taken into account to make such a determination. Interpretation Note 3 (Issue 2): Resident: Definition in relation to a natural person – ordinarily resident sets out the list of factors that will be taken into account to determine whether an individual is ordinarily resident for tax purposes in South Africa.
An individual can also become a tax resident by way of physical presence. For more details in this regard, refer to Interpretation Note 4 (Issue 5): Resident: Definition in relation to a natural person – physical presence test .
An individual who is deemed to be exclusively a resident of another country for purposes of a tax treaty is excluded from the definition of “resident”. It follows that while an individual may qualify as a resident under the ordinarily resident or physical presence tests, that individual will not be regarded as a resident for South African tax purposes if that person is a resident of another country when applying a tax treaty.
What is the impact of financial emigration on tax residence?
Acquiring approval from the South African Reserve Bank to emigrate from a financial perspective is not connected to an individual’s tax residence. Financial emigration is merely one factor that may be taken into account to determine whether or not an individual broke his or her tax residence. An individual’s tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether or not an individual breaks his or her ordinary residence.
Breaking tax residence
The determination of whether an individual breaks his or her tax residence is a factual enquiry on whether or not that person ceases to be ordinarily resident in South Africa. An individual, who is resident by virtue of the physical presence test, ceases to be a resident when that person is physically outside the Republic for a continuous period of at least 330 full days. A deemed disposal for capital gains tax purposes takes place at the time when an individual breaks his or her tax residence. The individual will be deemed to dispose of his or her worldwide assets, excluding immovable property situated in South Africa.
Exemption under section 10(1)(o)(ii) before 1 March 2020
The exemption under section 10(1)(o)(ii) applies to a South African tax resident who is an employee and renders services outside South Africa on behalf of an employer (South African or foreign) for longer than 183 full days in any 12-month period as well as a continuous period exceeding 60 full days outside South Africa in the same period of 12-months. The exemption does not apply to non-residents. If all the requirements are met, the resident will qualify for exemption on the entire portion of the remuneration relating to services rendered abroad. For further information on how the exemption operates, please refer to Interpretation Note 16 (Issue 2): Exemption from income tax: Foreign employment income.
This exemption, however, does not apply to remuneration derived by a person from services rendered outside South Africa for any employer in the public sector, or to a person who holds a public office to which that person was appointed or deemed to be appointed under an Act of Parliament. Income received by independent contractors are excluded from the scope of section 10(1)(o)(ii) as the income they receive is not considered to be remuneration.
The exemption under section 10(1)(o)(ii) from 1 March 2020
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 after 1 March 2020.
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.
What type of income is covered?
The following amounts fall with the scope of the exemption:
- taxable benefits;
- leave pay;
- overtime pay;
- allowance (including travel allowances, advances and reimbursements;
- amounts derived from broad-based employee share plans; or
- amounts received in respect of a share vesting.
Can double taxation occur?
Yes, if an individual earns employment income in excess of R1.25 million and the double tax agreement between South Africa and the foreign country, if any, does not provide a sole taxing right to one country, both countries will have a right to tax the income. The portion of the income in excess of R1.25 million may end up being double taxed.
Generally, under the provisions of the relevant double tax agreement, if an employee renders services in a foreign country exceeding 183 days, both countries enjoy the right to tax the income. The country of source enjoys the first right to tax the employment income and the country of residence, in our case South Africa, will provide double tax relief in the form of a foreign tax credit to the extent that tax was paid in both countries, subject to limitations.
Relief from double tax?
Section 6quat is the mechanism under South Africa’s domestic law to claim relief from double tax where the amount received for services rendered outside South Africa is subject to tax in South Africa and in the foreign country. This credit may be claimed on assessment through an individual’s income tax return, provided certain requirements are met.
An employer may at his or her discretion, under paragraph 10 of the Fourth Schedule, apply for a directive from SARS to take into account the potential section 6quat credit on a monthly basis to determine the employees’ tax liability. This will have to be done through a dedicated channel at SARS that will be made available to the public.