Currently, South African tax residents living abroad and earning remuneration in respect of services rendered outside of the country for or on behalf of any employer will be exempt from tax in South Africa, provided that the individual is outside of South Africa for more than 183 full days - 60 of which must be continuous days of absence from the country - during any 12-month period. There is currently no limitation on the foreign employment income exemption.
From March 1, next year the requirements will still apply, however, only the first R1 million earned from working abroad will be exempt from tax in South Africa. Accordingly, any foreign employment income earned over and above this amount will be taxed in South Africa, at a maximum marginal tax rate of 45 percent.
The requirement will affect only South African tax residents who earn remuneration in excess of R1m in respect of services rendered outside of South Africa, for or on behalf of an employer (which could be either a resident or non-resident employer). The R1m exemption will thus provide relief for lower- to middle-income South Africans working abroad, provided they meet the requirements referred to.
Historically, the purpose of introducing the tax exemption was to prevent double taxation of an individual's income between South Africa and the host country. However, the exemption has created opportunities for double non-taxation of remuneration derived from foreign services rendered by South African tax residents, where the host country imposes little or no tax on employment income.
Many expatriates believe that financial emigration is the quick and easy solution to “escape” the amendment to the foreign employment income exemption. However, taxpayers should be aware that formally emigrating from South Africa is not necessarily a “silver bullet” as this process has its own consequences.
In many instances, South African nationals living and working abroad could find themselves in a favourable position where they have technically ceased tax residency from a South African perspective, in that they may be considered ordinarily resident in the foreign country. In other words, where expatriates live and work abroad and are able, based on objective factors, to prove to the SA Revenue Service that their “centre of vital interests” (personal, family, economic relations and habitual abode) has shifted to the offshore jurisdiction, they will likely not be regarded as being tax resident in South Africa and will not be affected by this amendment.
However, from a cash-flow perspective, these individuals should be aware that the cessation of tax residency from South Africa could make them liable for capital gains tax at a maximum rate of 18 percent.
Before expats make knee-jerk decisions to cease tax residency in South and/or financially emigrate, they should consult an adviser to evaluate their tax residency status in South Africa and the offshore jurisdiction specific to their circumstances and thereby mitigate any adverse tax and/or exchange control consequences.
Sean Gaskell is group managing director at GMG.