With the South African Government increasingly coming under pressure to make up billions of Rands in revenue collection they have had to look at other sources. The large number of skilled South African’s who have moved abroad have become the latest target. For South Africans living abroad the amendment to the Income Tax Act meant that, from 1st March 2020, expats who are deemed to be South African residents would be liable for tax in South Africa on their foreign employment income insofar as it exceeds ZAR1 million. This change has become known as the “Expat Tax”.
In 2002, South Africa moved from a source based system of taxation to a worldwide basis of taxation. Any foreign earnings by South African residents would be liable to tax in South Africa even if they were not remitted to the country. However this is only applied to those individuals who are either classified as ‘physically present’ or ‘ordinarily resident’ South African residents.
When the tax system changed, a foreign employment earnings exemption was put in place to protect those people who earned employment income overseas from taxation in South Africa.
It is important to define what is meant by the term "resident". Any individual who is ordinarily resident (common law concept) in South Africa during the year of assessment or, failing which, meets all three requirements of the physical presence test, will be regarded as a resident for tax purposes.
The South Africa Revenue Service (“SARS”) physical presence test determines whether a South African is tax resident, based on physical presence in the country and is based on the number of full days spent in South Africa.
To meet the requirements of the physical presence test, that individual must be physically present in South Africa for a period or periods exceeding –
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
All three requirements must be met to satisfy the physical presence test. In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, is not be regarded as a resident from the day on which that individual ceased to be physically present. However, if an individual passes the physical presence test, they could still be taxed if they meet the ordinary residents test and will be taxed on their worldwide income and gains in South Africa.
The Ordinary residence test is not a day count test (a quantative test) but is judged by the actions, connections and intentions of the individual (a qualitative test) where precedent has been built up by the South African courts over many years.
This test shows that the purpose, nature and intention of the taxpayer’s stay outside South Africa must be established to determine whether a taxpayer is still ordinarily resident in the country. In the Cohen case (1946) Schreiner JA held that “… ordinary residence would be the country to which an individual would naturally and as a matter of course return from their wanderings”.
It is often said that formal financial emigration demonstrates that the individual is cutting ties with South Africa and that the individual fully intends to remain overseas. However this might not be necessary if the individual can demonstrate that they are ordinarily resident in the country they’re living in, then the tax should not apply.
Formal financial emigration can make it easier for inheritances and retirement annuities in South Africa to be brought out of the country as lump sums. Also, and importantly, this removes the spectre of donations tax and estate duty (maximum rates of 30%). The individual will have to stay out of the country for at least five years
Advice here is certainly needed, given various traps for the unwary. One has to consider any Capital Gains tax implications of any formal immigration after the individual has left South Africa as many exemptions could be lost.
At the same time as announcing the new tax on expats, like many other nations, South Africa launched a chance for taxpayers to come clean over undisclosed wealth while waiting for the Common Reporting Standard (“CRS”) to kick in with an amnesty. CRS is a data-swapping network of the tax authorities of more than 100 countries. Each authority compiles a list of accounts and investments controlled by foreign nationals and sends the details to the expat’s home nation tax authority for comparison with their tax filings. In return, other authorities in the network send financial data on expats back. The CRS network is now up and running, so SARS is already collecting information about the financial affairs of expats to cross-check against their tax returns. The result is if the expat fails to disclose income, SARS will have data from elsewhere indicating possible tax avoidance.
Many South Africans who are deemed ordinary residents who have earned income overseas, making over ZAR1m in the year of assessment will be affected even if they have paid tax in the jurisdiction they reside. It will also impact companies that send employees overseas for work.
South Africans who have permanently left the country, who have not settled their tax affairs, may also be subject to tax and penalties, depending on their individual circumstances. They have been encouraged to formalise their tax status and ensure their affairs are up to date.
One must note that the foreign employment income tax exemption has only ever applied to earnings, not to other sources of income, dividends, interest and capital gains overseas.
This has led to many having significant unexpected tax bills, while others, quite rightly, have been looking for the most legitimate tax efficient structures for their investments, in so far as South African tax is concerned.
International pensions and offshore investment bonds could be used to defer tax for a period and are ultimately chargeable to CGT at a maximum effective rate of 18% on profits, rather than income tax at up to 45%. This is another area where quality advice* is needed.
The expat tax will have a major impact on the competitiveness of South African businesses sending professionals abroad if they are unable to modify their remuneration policy. Those employed by foreign business may have less sympathy and those ‘employed’ through personal services companies having no-where to turn.
For some individuals whose earned income is in excess of the ZAR1 million exemption, they would have to decide to:
- To accept the reduction in post-tax income;
- Return to South Africa; or
- Formally emigrate if remaining overseas is their legitimate intention.
Peregrine Corporate Services Limited is licensed by the Isle of Man Financial Services Authority.
*Please seek the necessary advice from an advisor.