South African expatriates need not only understand the new expatriate tax law, but also act on it or face dire tax consequences.
By Jonty Leon, attorney and financial emigration legal manager
The amendment to the South African Income Tax Act No. 58 of 1962 has been fully enacted and forms part of the Taxation Laws Amendment Bill of 2017. Despite this, many South African expatriates are under the incorrect impression that the law has not been legally amended and will thus not affect them.
The new law states: “There shall be exempt from normal tax — any form of remuneration — to the extent to which that remuneration does not exceed one million Rand in respect of a year of assessment and is received by or accrues to any employee during any year of assessment by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance, including any amount referred to in paragraph (i) of the definition of gross income in section 1 or an amount referred to in section 8, 8B or 8C, in respect of services rendered outside the Republic by that employee for or on behalf of any employer, if that employee was outside the Republic.”
The new law, however, will only come into effect on 1 March 2020, to afford South African expatriates the opportunity to lobby Parliament and to allow them and their employers to get their ducks in a row.
Is R1-million enough?
The amendment will require that South African tax residents abroad will be required to pay South African tax of up to 45% of their foreign employment income, where it exceeds the R1-million threshold.
While this may seem enough, the problem is that employment income also includes allowances and fringe benefits paid to expatriates, which cannot economically be considered as “earnings”. The reality is that house, security, flights, and more are mostly part of expatriate packages to allow the expatriate to work in the foreign location. These eat up the R1-million threshold quickly, especially considering the harsh and expensive environments into which expatriates must often operate.
There are effectively three schools of thought for expatriates, excluding those who are adopting an “ostrich, head in sand” approach:
- There is a segment of expatriates who are starting to wrap-up their expatriate work, planning on returning to South Africa. We get an increasing number of enquiries regarding the change to legal status and strategies to be adopted to ensure that they do not compromise their previous tax- exempt status.
- The financial emigration route, which is the South African Revenue Service (SARS) and South African Reserve Bank (SARB) formal process to have noted that you are no longer “ordinarily resident” in South Africa, remains the only formal route in law to permanently have a status change noted. This is also the formality which has been noted in the National Treasury Parliamentary response document, which ensures that the new R1-million tax rule does not apply to a South African abroad.
- There is a cautious grouping of expatriates who have a “wait and see” approach, supported by the Barry Pretorius Expatriate Petition Group that continues to engage with National Treasury on expatriate compliance to get additional relaxation of the rules. This group also follows the double tax agreement route, getting tax residency certificates, which are a way of also achieving a non-residency status.
Act now – protect yourself
The most compliant way to fully ensure that foreign income earned as a South African expatriate is protected from South African tax is to formalise one’s emigration through SARS and the South African Reserve Bank.
This process is commonly known as Financial Emigration, and once undertaken by an expatriate, it cleanly cuts ties with South Africa from a tax perspective regarding foreign income.
One of the important items noted in last year’s Parliamentary process, was the caveat against last minute changes. It was noted that someone who has been an expatriate for a long period and that emigrates just before the 1 March 2020 effective date, must expect that their actions will be viewed with the necessary suspicion.
The prudent and fiscally conservative position remains to always have your tax affairs with SARS fully up to date and legally compliant – this includes having the correct tax status noted on the SARS system. Tax strategy includes that the SARS auditor must see a history and consistency in compliance, thus meaning the taxpayer is determined as a low or no-risk taxpayer.