[South Africa] New expat tax explained

South Africans living and working abroad will be impacted by new tax legislation from March 2020, Business Tech reports.

The new legislation specifically targets workers making over R1million a year from working abroad. The legislation will reportedly require them to pay a marginal tax rate of up to 45 per cent on anything earned over and above the first million.

Sean Gaskell - group MD of the Geneva Management Group - addressed five common queries about the new tax.

What will change?

South African tax residents living abroad and earning a wage for services rendered outside of South Africa for or on behalf of any employer are currently exempt from tax in South Africa. As long as the individual is outside South Africa for a period or periods over 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.

From 1 March 2020, those requirements will still apply but only the first R1million earned from working abroad will be exempt from tax in South Africa.

Any income earned from foreign employment over and above this will be taxed in South Africa at a maximum marginal tax rate of 45 per cent.

Who will be affected?

Only South African tax residents who earn a wage above R1million, for work carried out outside of South Africa, for or on behalf of an employer (which may either be a resident or non-resident employer).

The R1million exemption will provide relief for lower to middle-income South Africans working abroad, as long as they meet the requirements detailed above.

The tax amendment will also have an impact on companies that second South African employees abroad for work. Such companies must now fall in line with the legislative change.

How does the new tax impact South Africa’s economy?

The new tax will not have much practical impact. SARS may see short-term marginal gains but they are likely to be mitigated by an increase in the number of South Africans deciding to end tax residency and/or financially emigrate.

Why has SARS introduced the new regulations?

Historically, the introduction of tax exemption was to prevent double taxation of an individual’s income between South Africa and the host country.

However, applying the exemption has allowed 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.

It was proposed and legislated that foreign employment income earned by a resident should no longer be fully exempt to make sure the tax system promoted the principles of fairness and progressivity.

What can workers affected by the new tax do?

Concerns held by expatriates living and working abroad have led many to believe financial emigration is a fast ‘escape’ from the amendment to the foreign employment income exemption. Taxpayers should be aware that formally emigrating from South Africa can have its consequences.

South African nationals living and working abroad could find themselves in a beneficial position where they have technically ceased tax residency from a South African perspective and may be considered ordinarily resident in the foreign country.

If expatriates live and work abroad and can prove to SARS that their ‘centre of vital interests’ (i.e. personal, family, economic relations and habitual abode) has moved to the offshore jurisdiction, they are unlikely to be regarded as tax resident in South Africa and will not be affected by this amendment.

These individuals should be aware that the cessation of tax residency from South Africa might make them liable for capital gains tax, at a maximum rate of 18 per cent.

Before expats make their final decision to either cease tax residency in South and/or financially emigrate, Mr Gaskell advises them to seek professional help to evaluate their current tax residency status in South Africa and the offshore jurisdiction specific to their particular facts and circumstances in order to mitigate any adverse tax and/or exchange control consequences