On 1 March 2020 the amended section of the Income Tax Act concerning the foreign employment income exemption comes into effect.
This so-called “expat tax” has caused concern among South Africans working abroad who currently pay no tax if they meet certain criteria. But, from next year, only R1 million of this income will be exempt from tax here.
Such is the anxiety around this change that National Treasury held a workshop to discuss concerns on 6 March 2019, and there is concern that there is little understanding of the practical issues facing employers and employees. Treasury also indicated that they are not interested in a policy change and that the R1 million exemption will not be increased. However, we believe that the hype around the proposed change is clouding its fairness.
Let’s look at this without the emotion attached. If an expat is earning money outside South Africa but still owns property, has a family who lives here and wants to be seen as a South African, it is realistic for such a person to be required to pay some level of direct tax. And the R1 million threshold is quite reasonable considering the tax thresholds enjoyed by employees working in South Africa
Admittedly, most affected taxpayers are probably earning hard currency and the current weakened rand will, to some extent, negate the impact of the R1 million exemption. But expats do need to be taxed in some way.
If an expat is already paying direct tax in another country, then the effect of the new SA tax may be mitigated by tax paid elsewhere in terms of a double tax agreement with possible minimal effect. However, it is likely to be felt the most by those people working in tax havens, many of which have high levels of indirect taxes such as VAT, but where there is no payroll tax.
Who does treasury have in their sights?
For individuals earning less than R1 million abroad, this new amendment will have little impact, but Treasury is more likely to be targeting individuals such as pilots or oil rig workers who effectively retain a base in South Africa, but who work for an offshore company. Until now, these individuals were exempt from paying tax in South Africa, despite enjoying the benefits of their families living in the country.
It will be a challenge for someone who, until now, has not been paying tax to start doing so, but the impact might not be as large as has been reported. It is worth noting that the first R1 million of income is completely tax free, which is already a significant benefit if you are working in a country with a low tax bracket. You will only start paying tax in South Africa on the first rand earned from employment after that R1 million.
Be sure to seek the best advice
Of greater concern is the misinformation currently circulating around financial emigration, which is being touted as a way of continuing to pay no tax. This is not true: financial emigration does not necessarily exempt you from paying tax in South Africa.
In spite of emigrating, you are still liable to pay tax on any South African-sourced income and may also be found to be tax resident.
Exchange control residence and tax residence are two different issues, although formal emigration is a way to show the intention to break your tax residence which has a capital gains tax implication.
It is therefore essential that you obtain the correct advice from a qualified tax practitioner before making any decisions or applications regarding your assets and tax affairs.
Another problem is people who left South Africa years ago, although they have not financially emigrated.
They may no longer be tax resident in South Africa because they have been living abroad for such a long time.
They should try to clarify their status as taxpayers, but it is unlikely that the intention is that the South African Revenue Service (SARS) be able to apply the expat tax to them. It should be noted that expats who have not been submitting tax returns in South Africa although they were still South African tax residents and thus ought to have done so, are in default with SARS and financial emigration will not fix their tax compliance issue in retrospect.
Cross-border information sharing: no place to hide
It is also worth noting the impact of cross-border information sharing on the implementation of this expat tax.
Firstly, since expats have always been required to complete a tax return in South Africa, even if they were exempt from paying income tax on foreign employment income, this information is already available to SARS.
On top of that, due to information sharing between countries and banks, SARS will know exactly how much is paid into anyone’s bank account.
Information sharing agreements were specifically noted by Finance Minister Tito Mboweni in his 2019 National Budget as a key focus area for fixing SARS and tightening the tax net.
This means that expats too will increasingly be on SARS’s radar, underlining the importance of ensuring that your affairs are in order and in compliance with these new proposed amendments.
Hilary Dudley is the Managing Director at Citadel.