THE news that amendments to the tax laws will remove the income tax exemption on South Africans working overseas has come as a blow to expatriates and their employers. However, it must be borne in mind that the amendments are not final and considerable discussion will take place before they are implemented.
Even if the amendments are implemented in their current form, there are some measures expats may be able to take to avoid paying full tax as if they were working in South Africa, and even paying double tax – both to the South African Revenue Service (Sars) and to the country in which they are working.
Currently, under section 10 of the Income Tax Act, expats working abroad can claim an exemption from Sars on their income, effectively paying income tax only to the country in which they are employed.
Jerry Botha, the managing partner of Tax Consulting, says the draft amendment law will repeal this exemption completely, which means that income South Africans earn overseas will become fully taxable, and the only relief that may be claimed will be for foreign taxes paid.
For example, if you are on a marginal tax rate of 45% and are taxed at a rate of 25% in a foreign country, Sars will collect the difference of 20%.
Botha says some expats have indicated that, if they are taxed in full, coming home may be their only option.
“This law is proposed to take effect on March 1, 2019, so there is a bit of a grace period for expatriates to get their house in order,” he says.
One option is to emigrate properly, but this will trigger capital gains tax, because you will be deemed to have disposed of your assets, he says.
“Other taxpayers are looking at establishing tax-treaty residency in another country, but this is not as simple as getting a tax-residency certificate. Anyone who has been through a Sars process will know how complex this may become,” Botha says.
Mike Abbott, the head of wealth at Sable International, says the amendments will not apply to all South Africans who work abroad.
“In terms of the residence-based system of taxation, South African residents are taxed on their worldwide income. If a resident works in a foreign country for more than 183 days with no tax payable in the foreign country, that foreign employment income will benefit from double non-taxation.
“Section 10 of the Income Tax Act exempts income for services rendered outside South Africa for periods exceeding 183 days in a 12-month period, of which at least 60 must be consecutive. This relates only to employment income and not other types of income. It is also not applicable to self-employed people or sub-contractors,” Abbott says.
He says expats may escape the effects of the amendments if:
• They are not deemed to be ordinarily resident in South Africa (in other words, not a South African tax resident); and
• They are deemed to be resident in their foreign country by virtue of the provisions of a double-taxation agreement.
The onus is on the taxpayer to prove this, he says.
The deadline to submit comments to National Treasury is August 18.