JOHANNESBURG - With the festive season upon us, many South Africans are returning home from working abroad to enjoy the holidays with their friends and families.
However, they may be travelling back in the new year with an extra burden. With effect from 1 March 2020, South African residents working abroad (expats) will be required to pay up to 45percent in taxes to the SA Revenue Services on their foreign-earned income, where such income exceeds the R1 million threshold in that year of assessment.
South Africa has a residence-based tax system. This means that residents are taxed on their worldwide income, and non-residents are only taxed on their actual or deemed South African sourced income. A resident, for tax purposes, is someone who is either ordinarily resident in the country or physically present in the country for a specified period.
Certain exemptions presently apply to income earned by expats if they have worked abroad for a period of more than 183 full days in aggregate and exceeding 60 continuous full days during any 12-month period as provided for in section 10 (1)(o)(ii) of the Income Tax Act. As a result of these tax exemptions, expats have enjoyed working abroad without significant tax implications and, in certain instances, would be fully exempt from South Africa’s income tax net. This exemption would not apply to government employees working abroad.
An important issue to consider regarding this amendment is what is meant by “ordinary resident”. There is a body of case law on how to determine whether someone who is not always physically present in South Africa would be considered an “ordinary resident”. In simple terms, the place where one naturally returns will be regarded as the place where they are ordinarily resident. In most instances, expats typically return, or intend on returning, to South Africa and are thus considered ordinary residents for tax purposes.
National Treasury maintains that the R1 million threshold is fair and reasonable as it will not apply to all expats and will also achieve Treasury’s intended purpose i.e. to close the loophole on those expats who unfairly benefit from double non-taxation, where they do not pay taxes in South Africa or the country they are employed in. Treasury also seeks to widen this tax net to recover more revenue from those who previously fell outside these tax laws.
Arnold Mbeje is an associate at Cox Yeats Attorneys practising in the Corporate & Natural Resources Law Team.
This impending amendment has been met with mostly negative responses as the effects will be more adverse than beneficial to the country. While expats who earn below the stipulated threshold will not be affected by this amendment, those who will be caught by this wider tax net may consider financial emigration or terminating their South African tax status altogether.
Financial emigration may have further tax implications, especially for expats who own multiple assets in South Africa. It may be prudent to seek professional advice on the most tax efficient way to structure your affairs should you be considering a financial emigration.
Arnold Mbeje is an associate at Cox Yeats Attorneys practising in the Corporate & Natural Resources Law Team; Marikah Calo is a candidate attorney, completing her articles within the Corporate & Natural Resources Law and Construction Teams. They can be contacted on 031 – 536 8500 or via email: ambeje@coxyeats.co.za and mcalo@coxyeats.co.za.
