One of the most important announcements made by Finance Minister Tito Mboweni in his 2020 Budget Speech is the tax exemption threshold on “expat tax” that is being raised to R1.25 million as of 1 March 2020.
“Expat tax” will henceforth be deducted from any foreign employment income (in excess of R1.25 million) garnered in by a South African tax resident who works abroad for 183 full days of a year (of which 60 must be continuous). The tax only applies to individuals earning an income through permanent employment and not income garnered in through freelance or self-employed ventures.
The biggest question many South Africans may have is whether or not they are tax residents. Two tests are applied to determine this.
The first is the “ordinarily resident” test. While this includes individuals that claim SA as their home country even when they live abroad and will only return at a later stage, “ordinarily resident” may also be determined by considering aspects including residential, business and even social activities.
The next test is the “physical presence” test that should be applied if the individual is not considered “ordinarily resident”. This test determines whether an individual has been within South African borders for 91 days each year, for the previous 5 years, and for a total of 915 days over those 5 years.
It is important to note that your tax residency may be influenced by but will not inherently be altered by financial emigration alone. Your tax residency will only cease when you are no longer a resident of RSA or when you do not meet the physical presence requirements.
Ceasing your tax residency doesn’t necessarily cut all your ties with SARS, though. Upon notifying SARS that you should no longer be deemed a SA tax resident (without such a notice you will remain a tax resident in their eyes), SARS will head an investigation to either confirm or refute your claim. Once you have emigrated your tax residency successfully, you will be liable to pay the capital gains tax of your deemed disposal, and you will still need to file a tax return for any income originating from within SA.
Double Tax Relief
If your income is being taxed in both the originating country and in SA, you may be able to apply for tax relief if South Africa has a double taxation agreement (DTA, with the other country. As you are only viable to be an ordinary tax resident in one country, the other country will provide tax relief in terms of the DTA. The portion of foreign employment income that exceeds R1.25 million may, however, be taxed by both countries if a DTA does not exist between SA and the country where the income originated from. Special relief can still be applied for from SARS.
Make sure you understand all the finer details of “expat tax” and how it will influence you in the future to ensure you plan accordingly and make the necessary arrangements where necessary.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)