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.
However, the hype around this new tax may ultimately be clouding its fairness according to Hilary Dudley, MD of Citadel Fiduciary.
“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,” she said.
“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,” she said.
Dudley said that if an expat is already paying direct tax in another country, then the effect of the new South African 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, she said.
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, said Dudley.
Until now, these individuals were exempt from paying tax in South Africa, despite enjoying the benefits of their families living in the country, she said.
“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.”
Dudley said that it is also important to get expert advice – especially when it comes to financial emigration, which is being touted as a way of continuing to pay no tax.
“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,” she said.
“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.”
Another problem is people who left South Africa years ago, although they have not financially emigrated, Dudley said. “They may no longer be tax resident in South Africa because they have been living abroad for such a long time.”
Dudley said that while these citizens should try to clarify their status as taxpayers, 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,” she said.