If you’re a South African who lives abroad, you have probably heard about the new expat tax law that will come into effect as from March 2020. This law has caused quite a stir and no one seems to understand what is going on. There is a lot of misinformation out there. So here are a few details to help you:
What is South African expat tax
“The South African Revenue Services (SARS) have recently announced their plans to tax South Africans working abroad. Expats could face having 45% of their earnings over R1 million fed back to government.” – Business Tech SA
The history of exemption
Historically, residents of South Africa have enjoyed an exemption [section 10(1)(o)] from their South African income tax on income earned for services rendered outside of South Africa. This was as long as you spent more than 183 days outside of SA (of which 60 days had to be continuous) in the tax year. So you could be living in South Africa, and then get sent on assignment in Europe for 7 months, and the income which you earned for the time you worked in abroad would be exempt from tax in SA. The income you earned for the other 5 months, for services rendered in SA would however still be taxable. Typically though, you might have found that your income for the 7 months you spent abroad may well have been taxed in the country you were working in anyway so it is not like you necessarily scored much unless the country where you are working has a lower tax rate.
Changes: The new South African expat tax law
Under the above mentioned criteria, only the first R1 million earned for services rendered overseas will be exempt and any amount above that will be taxed in SA. Even under these circumstances though, you won’t pay double tax, you will only have to pay the tax rate differential if your SA tax rate is higher than the foreign tax rate. So if your SA tax rate is 45% and your income earned abroad was already taxed at 30%, you wouldn’t now have to pay another 45% tax in SA, instead SARS would tax you on the incremental 15% difference between the two rates only, with the ultimate effect of you having paid a single tax which is the higher of the two countries rates.
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The entire matter revolves around a person’s residency. Residents are taxed on their worldwide income (subject to certain exemptions such as the one outlined above) and non-residents are taxed only on income from an SA source, subject to double tax treaties. The above exemption therefore has no relevance to non-residents because the income for services rendered in (example) USA would not be income from a South African source and would therefore be none of SARS business insofar as it relates to non-residents.
Income for non-residents from an SA source would be taxable by SARS but these are in no way affected by the change in the above exemption because that exemption only applies to income from services rendered outside of SA so in terms of income from an SA source, absolutely nothing changes as a result of this much hyped “expat tax” change. So the real question people should be asking themselves now is “am I a resident of South Africa for tax purposes”. If the answer is no, then really nothing changes. If the answer is yes, then indeed you might find yourself having to pay in some SA tax if the foreign tax rate is lower than the applicable SA tax rate.
So we need to determine whether you are an SA resident or not for tax purposes.
It is important to understand that this has nothing to do with nationality or passports.
On Page 7 of SARS interpretation note 3/2018, SARS states that “The concept of ordinary residence must not be confused with the terms ‘domicile’, ‘nationality’, ‘citizenship’ and the concept of ‘emigrating’ or ‘immigrating’ for exchange control purposes.”
I’ve seen plenty of articles with advisers peddling the idea of financial emigration but I’m not so convinced by that. Financial emigration is not a tax concept but rather is only applicable from an exchange control perspective. I think the reason why it gets brought up so much is because going through this process might strengthen your argument in terms of showing the intention to break your tax residence if ever challenged by SARS, but it is by no means as simple as that.
Rather, tax residence under SA tax law in isolation is determined by rules which are stated in the Income Tax Act. In short, you are a tax resident of SA if you meet one of the following criteria:
1. You are ordinarily resident in SA; or
2. You meet the criteria of an objective physical presence test.
There are thus two tests to apply, and these can be unpacked as follows:
What is an Ordinarily Resident?
Section 4 of the interpretation note 3/2018 notes that the Act does not define the term “ordinarily resident”. The courts have, however, considered its meaning and have established principles to be applied in determining the place in which a natural person is ordinarily resident.
You can read paragraph 4.1 of the interpretation note for more elaborate discussions about how the courts have interpreted this in the past and what precedents have been set by these judgements, but in essence, I think the most crucial part is the following:
“If, though a man may be “resident” in more than one country at a time, he can only be “ordinarily resident” in one, it would be natural to interpret “ordinarily” by reference to the country of his most fixed or settled residence.”
So as an expat your ordinary residence would be the country to which you would naturally and as a matter of course return from all your wanderings, as contrasted with other lands it might be called his usual or principal residence and it would be described more aptly than other countries as his real home.
If you left SA in xxxx and not returned since, and relocated your entire family to Scotland for example, you could not possibly be considered as an ordinarily resident in SA.
What is the Physical Presence test
The physical presence test is laid out in the definition of “resident” in the income tax act (in an annexure of the interpretation note 3/2018) and basically says that if you are not ordinarily resident, then you are still an SA tax resident by virtue of your physical presence in SA if you have been in SA for 91 days during the relevant year of assessment and each of the 5 years preceding that year and the total days for those 5 preceding years exceeds 915 days.
Any income received by SA Tax residents from sources in SA and abroad must be declared and taxed in SA.
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