South African expatriates should not only understand the new expatriate tax law, which endangers their foreign income, but should also act if they want to avoid its dire consequences.

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 new law states: “There shall be exempt from normal tax any form of remuneration to the extent to which that remuneration does not exceed one million rands 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 new law will come into effect on March 1, 2020, so expatriates can still lobby Parliament, and they and their employers have time to get their affairs in order.

Is R1m enough?

The amendment requires South African tax residents abroad to pay South African tax of up to 45% of their foreign employment income where it exceeds the threshold of R1 million.

Although the R1m threshold may seem generous, employment income includes allowances and fringe benefits paid to expatriates that cannot be considered as “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 R1m threshold, particularly in the expensive countries in which expatriates often live.

The options

When it comes to expatriates’ options, there are effectively three schools of thought, excluding the “head in the sand” approach. These are:

• Some expatriates are starting to wrap up their offshore work and are planning to return to South Africa. We at Tax Consulting SA receive a  large number of enquiries from expatriates regarding the change to their legal status and the strategies they can adopt to ensure that they do not compromise their previous tax-exempt status.

• Financial emigration. To do this, you must notify the South African Revenue Service (Sars) and the South African Reserve Bank that you are no longer “ordinarily resident” in South Africa. This is the only formal route in law permanently to have a status change noted. 

• A more cautious group of expatriates have adopted a “wait and see” approach. They are supported by the Barry Pretorius Expatriate Petition Group, which negotiated the R1m exemption and which continues to engage with National Treasury on having the rules relaxed further. The group also helps expatriates to obtain tax-residency certificates, which is another way of achieving non-residency status.

Clean break

The most compliant way to ensure that foreign income earned as a South African expatriate is protected from South African tax is to formalise your emigration through Sars and the Reserve Bank. This process is commonly known as financial emigration, and, once it has been completed, the tax ties with South Africa are cut cleanly with regards to foreign income.

One of the important items in last year’s parliamentary process was the caveat against last-minute changes. It was noted that someone who has been an expatriate for a long period and who “emigrates” just before March 1, 2020, must expect their action to be viewed with suspicion.

The prudent position is to be legally compliant and have your tax affairs fully up to date, which includes having your correct tax status noted on the Sars system. For Sars to regard you as a low-risk taxpayer, it must see a history of consistent compliance.

Jonty Leon, an attorney, is the legal manager, financial emigration, a subdivision of Tax Consulting SA.