Ever since the new taxation laws amendments (effective on 1 March 2020), the phrase “expat taxes” has been floating around, with all sorts of plans and schemes being entered to circumvent this “new” expat taxes.
If you have been scurrying around in a panic because of these expat taxes, here’s what you need to know about it:
What is it? – In the Income Tax legislation there is an exemption for South African residents who render services outside of South Africa.
The exemption in terms of Section 10 (1)(o)(ii) requires that the resident spend more than 183 days outside of South Africa, of which more than 60 days must be continuous. Previously this exemption had no monetary limit, it was purely based on the number of days worked outside of South Africa as a portion of the total number of days worked during a 12-month period. The new law that is being introduced is the restriction of this exemption of R1 million per annum for an individual who complies with 10(1)(o)(ii). Therefore, if you earn more than R1 million from rendering services abroad, only R1 million of that income will be allowed to be exempted for South African tax purposes, provided that the requirements for section 10(1)(o)(ii) have been met.
Any amount of income that exceeds the R1 million in respect of services rendered abroad, will be subject to up to 45% income tax in South Africa from 1 March 2020, meaning that it will influence the 2021 year of assessment and onwards.
Will I get double taxed? – No. This legislation ensures that a South African resident who earns more than R 1 million from services rendered abroad will effectively pay a maximum tax rate of 45%. South Africa will have the rights to tax the income only to the extent that such income was not taxed abroad. Thus, say for example a taxpayers effective tax rate would have been 45% in South Africa and the taxpayer is taxed at a 31% rate abroad, SARS will only be allowed to tax the income at an additional 14% to allow for a total effective tax rate of 45% which is what you would have paid had all your income been subject to South African tax.
Will financial emigration help me?
Many have scrambled to begin the process of financial emigration to circumvent this new legislation, however financial emigration will not necessarily fix your problem.
When considering whether a person is a South African resident for tax purposes, financial emigration is not sufficient to prove that the person is no longer a South African tax resident. It is therefore important to note that Tax residency in SARS eyes is different from normal residency in the eyes of the Reserve Bank.
SARS will consider the persons ordinary residence, which is determined as the country to which such person intends to “return from their wanderings”. For example, if you have financially emigrated, but you own a residence in South Africa, your kids go to school in South Africa and your wife remains in South Africa, then it is clear that South Africa is the country that you intend to return to from your “wanderings”. But bear in mind that this is a question of law and there is a plethora of court cases that give clear and to the point judgements on the matter.
What must I do as a taxpayer? In order to prove to SARS that you comply with the section 10(1)(o)(ii) exemption, you need to keep record of your passports, employment contracts and proof of payment of taxes abroad, and yes, thy shall declare all thy income, both domestic and abroad.
It is clear from the complexity of “tax residence”, that when considering your approach to tax planning you should appoint a qualified tax adviser to ensure that you don’t step onto any landmines.
Those who fail to plan, plan to fail. Only the truth and the whole truth, so help you, will set you free.
Jade Els and Willem Oberholzer are Tax advisers for Probity Advisory.