Please note that the below does not constitute formal tax advice.
As part of the residence-based tax system’s implementation in 2001, Treasury introduced Section 10(1)(o)(ii) of the Income Tax Act. This section provides relief for South African tax residents receiving foreign employment income.
The section states that South African tax residents who were outside of South Africa for a total of more than 183 days during any 12-months, including a continuous period of 60 days, will not pay tax on their foreign employment income. The resident will receive an exemption for the total foreign employment income amount. This amount still needs to be declared as part of the resident’s South African taxable income.
In cases where a South African tax resident failed to adhere to the number of days outside of South Africa and therefore not qualified for the Section 10(1)(o)(ii) exemption, the resident will receive a tax credit in South Africa, for tax paid in the foreign country. The foreign taxable income will be added to any local taxable income and tax will be calculated accordingly. The foreign tax credit may then be applied against the South African tax liability.
Treasury announced that from 1 March 2020 South African tax residents who spend more than 183 days during any 12-months, including a continuous period of 60 days would only be exempt up to R1 million of their foreign employment income earned abroad. Meaning that any foreign employment income earned over and above this amount will be taxed in South Africa, applying the normal tax tables for the particular year of assessment. The foreign taxable income above R1 million will be added to any local taxable income and tax will be calculated accordingly. A foreign tax credit (if tax was paid abroad) may then be applied against the South African tax liability. To qualify for this exemption residents will still need to adhere to the number of days outside South Africa as stated in Section 10(1) (o)(ii).
Treasury’s reasoning behind this amendment is that it will bring relief for lower to middle income South Africans working abroad while avoiding situations where no tax is paid in either country (such as 0% tax rate in UAE). According to Treasury, this was never the intention of the act. This change in Section 10(1)(o)(ii) will be implemented as from the 01 March 2020.
How tax residency status is determined
In eliminating double taxation between two countries, an agreement is made in the form of a double tax agreement (DTA). Both countries, being the source country and the residence country, may enter into a DTA to agree on which country should tax the income to prevent the same income from being taxed twice. The source country is the country that hosts the income, and the residence country is the taxpayer’s country of residence.
The DTA must first be approved by Parliament and published in the Government Gazette where after it has effect as if enacted in the Act. The DTA provisions and those of the Act should, therefore, be reconciled and read as one coherent whole. If there is a conflict between the general definition of a South African resident, as defined in Section 1(1) of the Act and the definition in a DTA, the DTA takes preference. Thus, meaning a person who is exclusively a resident of a country other than South Africa for purposes of the application of a DTA is not a tax resident of the Republic under the Act.
SARS also makes use of two tests in determining a taxpayer’s tax residency status. These are the ordinarily resident test and the physical presence test. Meeting the requirements of these tests will classify you as a South African resident for tax purposes.
The ordinarily resident test, also known as the “pipe and slipper test”, looks at the location of your permanent home as well as where your assets and family are based. In short, your ordinary resident country is the country to which you would naturally return from your wanderings. If these all fall within the borders of South Africa, you will be deemed a South African tax resident, regardless of the number of years you have spent overseas.
If you are not ordinarily resident in South Africa, you could still qualify as being a South African tax resident in terms of the physical presence test by calculating the amount of time you spend in South Africa. To pass this test and be deemed a resident for tax purposes, you need to be present in South Africa for:
- 91 days or more in the year of assessment
- 91 days or more in each of the preceding five years of assessment
- 915 days in total during those five preceding years of assessment
If you fail to meet any one of these requirements, you will not be deemed as physically present in South Africa. It is important to note that the DTA will still take preference over the ordinarily resident and physical presence test.
If you are regarded as being tax resident in both South Africa and in another country with which South Africa has a DTA in place (i.e. the country you work in), your tax residence status will be in favour of the country the tie-breaker clause in the DTA falls. If it falls in support of South Africa, you would be regarded as tax resident only in South Africa, but if it falls in favour of the other state (i.e. where you work), your South African tax residence will cease. Usually, the tie-breaker clause provides that a dual resident is deemed to be resident of the country where he has a permanent home available to him. If he has a permanent home available in both countries, he will be deemed to be resident of the country where his personal and economic interests are closer (i.e. his centre of vital interests). If his centre of vital interests cannot be determined, where he has a habitual abode will be the deciding factor, and if all of the above will be equal in both states, the country of which he is considered to be a national will be his country of residence for purposes of DTA.
With the announcement of the change in the tax structure, it has forced many to think of alternatives regarding their tax residency.
Financial emigration, also known as formal emigration, is the process of making a formal application to the South African Reserve Bank (SARB) to become a non-resident of South Africa. Once you have completed the process, you will be a non-resident of South Africa for exchange control purposes only. Not needing to be present in South Africa, financial emigration can be done from your house abroad. Financial emigration is seen as an exchange control matter and will not affect your South African citizenship or tax status. Thus, meaning that financial emigration will not exclude a South African taxpayer from being a tax resident. Financial emigration merely substantiates your intention of not returning to South Africa. You will always legally be a South African and can return to South Africa to live and work as you choose. Although a complex application, it will differ depending on your circumstances.
Financial emigration therefore does not exempt you from paying tax on South African-source income.
It is thus clear that the only way for a taxpayer not to pay tax in South Africa, is when he/she is no longer seen as a tax resident. Non-residency will be achieved by applying the DTA between South Africa and the other state, determining which country should tax the foreign income, to which the ordinarily resident test (pipe and slipper test) and the physical presence test will also be applied. Seeing the complexity of this topic, it is of upmost importance to obtain the correct advice before making any decisions regarding your tax affairs.
Author: Johandrie van Tonder
Peer reviewed: Chris Herbst