From March 2020, South Africans living and working abroad will find themselves at the centre of new tax legislation.
Aimed specifically at anyone earning more than R1-million a year while working abroad, the legislation will see them pay up to a 45% marginal tax rate on anything they earn over and above that first million.
With some confusion still surrounding the legislation Sean Gaskell, group MD of the Geneva Management Group, outlined five of the most common questions and answers around the new tax.
1. What’s changing?
Currently, South African tax residents living abroad and earning remuneration in respect of services rendered outside of South Africa for or on behalf of any employer, will be exempt from tax in South Africa, provided that the individual is outside of South Africa for a period or periods exceeding 183 full days (60 of which must be continuous days of absence from the Republic), during any 12 month period.
There is currently no limitation on the foreign employment income exemption.
As from 1 March 2020, the requirements referred to above will still apply, but only the first R1 million earned from working abroad will be exempt from tax in South Africa.
Accordingly, any foreign employment income earned over and above this amount will be taxed in South Africa, at a maximum marginal tax rate of 45%.
2. Who’s affected?
Only South African tax residents who earn remuneration in excess of R1 million, in respect of services rendered outside of South Africa, for or on behalf of an employer (which could either be a resident or non-resident employer).
The R1 million exemption will thus provide relief for lower- to middle-income South Africans working abroad, provided of course that they meet the requirements referred to above.
In addition, the tax amendment will have an impact on companies that second South African employees abroad for work, as these companies will now be required to adhere to the legislative change.
3. What does the new tax mean for SA’s economy?
Practically, very little. While SARS may see marginal gains in the short-term, these are likely to be mitigated by an increase in the number of South Africans opting to cease tax residency and/or financially emigrate.
4. Why is SARS implementing these new regulations?
Historically, the purpose of introducing the tax exemption was to prevent double taxation of an individual’s income between South Africa and the host country.
However, the application of the exemption has created opportunities for double non-taxation of remuneration derived from foreign services rendered by South African tax residents, where the host country imposes little or no tax on employment income.
In order to ensure that the tax system promotes the principles of fairness and progressivity, it was proposed and subsequently legislated that foreign employment income earned by a resident should no longer be fully exempt, as is currently provided.
5. What can those affected by the new tax do about it?
Given the angst amongst expatriates living and working abroad, many believe that financial emigration is the quick and easy solution to ‘escape’ the amendment to the foreign employment income exemption.
However, taxpayers should be aware that formally emigrating from South Africa, is not necessarily the ‘silver bullet’, as this process bears its own consequences.
In many instances, South African nationals living and working abroad could likely find themselves in a favourable position where they have technically ceased tax residency from a South African perspective, in that they may be considered ordinarily resident in the foreign country.
In other words, where expatriates live and work abroad and they are able, based on objective factors, to prove to SARS that their ‘centre of vital interests’ (i.e. personal, family, economic relations and habitual abode) has shifted to the offshore jurisdiction, they will likely not be regarded as being tax resident in South Africa and will not be affected by this amendment.
However, from a cash-flow perspective, these individuals should be aware that the cessation of tax residency from South Africa could make them liable for capital gains tax at a maximum rate of 18%.
In all other instances, I would highly recommend that before expats make ‘knee-jerk’ decisions to either cease tax residency in South and/or financially emigrate, they should consult a trusted advisor to evaluate their current tax residency status in South Africa and the offshore jurisdiction specific to their particular facts and circumstances and thereby mitigate any adverse tax and/or exchange control consequences.