Expecting Expat Tax
All South African tax residents working abroad should be considering whether they may be impacted by tax law changes which will enter into force on 1 March 2020.
As a point of departure, it needs to be understood that a person is regarded as a South African tax resident if he/she is “ordinarily resident” in SA. There is a great deal of case law and commentary as to the meaning of “ordinarily resident”. Very broadly speaking – the place to which a person “naturally returns to” is regarded as the place where such person is ordinarily resident.
Alternatively, if a person is not “ordinarily resident” in South Africa, he may still be regarded as a South African tax resident in terms of the so-called “physical presence” test. This test is often confused with the “days test” provided for in the expatriate exemption as set out below. Broadly speaking, a person would be resident for tax purposes in South Africa if he/she is physically present in SA:
- for more than 91 days in aggregate during a year of assessment as well as more than 91 days in aggregate during each of the 5 years preceding such year of assessment; and
- for a period or periods exceeding 915 days in aggregate during those 5 preceding years of assessment.
In very limited circumstances, despite being tax resident in South Africa in terms of either the “ordinarily resident” or the “physical presence test”, an individual may constitute a non-resident for tax purposes on the basis of the application of a Double Tax Agreement concluded between South Africa and the relevant foreign jurisdiction read with the definition of “resident” as contained in section 1 of the Income Tax Act No. 58 of 1962.
Position in terms law currently in force
A South African tax resident person is subject to income tax on his worldwide income. In contrast a non-resident is only subject to South African income tax on South African sourced income.
In certain instances, however, a South African tax resident working abroad is fully exempt from South African income tax on his or her foreign employment income in terms of the so-called “expatriate exemption”. This would inter alia apply where the South African tax resident:
- receives foreign employment income (i.e. this exemption does not apply in respect of foreign interest or foreign dividends accrued or received);
- spends more than 183 days in a 12-month period abroad; and
- spends a continuous period exceeding 60 full days abroad during that 12-month period.
The above-mentioned exemption has been the basis upon which most South African expatriates work abroad without significant South African tax implications in respect of their foreign employment income.
Position as from 1 March 2020
As from 1 March 2020, the above-mentioned exemption will no longer apply to the extent that the South African expatriate receives or accrues remuneration in excess of R1 million.
For SA expatriates earning foreign employment income of less than R1 million per year the position will accordingly remain largely unchanged.
However, to the extent that a South African tax resident working abroad earns more than R1 million foreign employment income per year – he/she will be subject to South African income tax. To the extent that such South African tax resident may be subject to source-based taxation in the jurisdiction within which they work, a tax credit may be available to avoid double tax.
Impact of law change
Many expatriates are finding that they will have significantly less disposable income due to the above legislative amendment. Unfortunately, as a result of this amendment, South African tax residents who have been based offshore (often spending their foreign earned salaries in South Africa when visiting their friends or family) are opting to terminate their South African tax status by relocating abroad permanently together with their families.
Although tax emigration is a fairly simple process to attend to administratively, the steps that a taxpayer should take to lose their “ordinary residence” in SA and the tax impact of such emigration should be very carefully considered. In particular, upon losing one’s SA tax residence, a capital gains exit charge at a maximum effective rate of 18% may be levied on the worldwide assets of the taxpayer (save for inter alia South African immovable property).
Accordingly, South African tax resident expatriates with significant assets in their personal names may find themselves in a position where South African tax emigration may be very costly.
It is also important to note that the loss of one’s South African tax residence does not necessarily mean that one automatically loses one’s exchange control residence. It also does not follow that one must lose South African exchange control residence in order to proceed with tax emigration. Proper advice must be sought to make an informed decision in relation to both tax and exchange control emigration.