Looming Tax Changes For South Africans: What You Should Know
South Africans living or working abroad have voiced widespread outrage and concern over the pending repeal of Section 10 of the Income Tax Act which deals specifically with taxation of foreign income.
Though the amendment will not come into effect until 2019 and has seen some noteworthy changes to the proposed bill thus far, it’s still important to be aware of the changes and how they may affect your income.
What does Section 10 currently state?
For the time being and until the new bill is passed, Section 10 of the Income Tax Act states that South Africans temporarily abroad are exempt from tax on their foreign sourced income for periods worked abroad.
We’ve covered the definition of “temporarily abroad” in one of or previous blogs, so we’ll only give a brief overview. As a South African temporarily abroad not counted as a mere traveller or visitor, you need to be broad for more than 183 days of which at least 60 days need to be consecutive. Of course, this is a very broad definition, and under such definition many South African expats who have been abroad for several years quite rightly deem this definition applicable to them.
Why is taxation on foreign income being amended?
The South African Reserve Bank and Revenue Service have jointly identified a rising incidence South Africans seeking financial refuge in tax havens or utilising lower tax rates abroad to improve their income while they are still tax residents of South Africa.
It should be noted that the tax amendment will not apply to South African emigrants who have applied for financial emigration – as they would legally fall under the tax jurisdiction of the new country where they are living. The amendment is therefore only suggested to address tax evasion by South Africans who are benefiting from lower taxation rates abroad while still legally tax residents of South Africa.
The amendment will see South Africans living or working abroad eligible for paying the full shortfall of taxes as determined by their South African tax bracket. Consequently, if you live in countries whose taxation works is in line with South Africa’s tax treatment you needn’t worry. But if you are, for instance, eligible for 45% income tax in South Africa and currently only pay 25% tax abroad, SARS will recover the additional 20% from you.
Relaxation of the amendment
With widespread outrage over the amendment, SARS has stated that they have amended the initial amendment and will only levy taxes for South Africans abroad on amounts exceeding R1 million in any tax year. That means that the only people liable for paying the tax shortfall will be those earning in excess of R1 million per year.
If approved, the amendment will apply effectively from March 2019. This means that South Africans living or working abroad who have not emigrated financially and who qualify as South Africans temporarily abroad will pay shortfall tax on any amounts earned exceeding R1 million for any subsequent tax years. For South Africa, the fiscal (taxation)year runs from 1 March until 28/29 February in the subsequent year.
Different Measures Of A Year And Methods Of Taxation
It is important to make a distinction as to how SARS and the SARB measure income and expenditure. One aspect of cross-border finance which is quite confusing is the fact that different regulations apply to different annual terms – such as the Gregorian calendar year, fiscal year, financial year or taxation year.
For South Africans the fiscal and taxation years are synonymous, whereas a financial year may refer to the financial year determined by a particular company or industry and a calendar year stretches from 1 January to 31 January in a particular year.
In the USA, on the other hand, the IRS allows for the filing of taxes on a 52 to 53 week annual schedule as opposed to the normal fiscal year – but businesses employing this method need to end their year on the same day of the week each year. In the UK, the fiscal year does not run from the first day of the month, but from the sixth of April each year due to the country’s switch from the Julian to the Gregorian calendar in 1753. Other countries do not employ the Gregorian calendar at all, which means their calendar years will not cover 1 January until 31 December. These countries may employ lunisolar, Saka, Vikram Samvat or Hijri calendars alongside the Gregorian calendar, such as India, China and the UAE or follow an entirely different annual calendar, such as the Orthodox Tewahedo or Coptic calendars followed in Ethiopia and Eritrea. The latter calendars have 13 months per year of 30 days each with an intercalary month at the end of the year ranging from 5 to 6 days depending on whether it is a leap year.
It should be noted, additionally, that countries with an Islamic orientation or those applying Islamic law have different taxation and financial requirements and stipulations for their native citizens, Muslim residents or visitors, foreign expats and non-Muslim. These tend to require zakaah on Muslim residents or citizens, which is a charitable amount (broadly speaking) payable by all believers to take care of the less fortunate and their communities. In addition to this, non-believers (usually males only) may be liable for jizya, which is variable tax payable by foreigners or non-believers residing within Islamic regions. Furthermore, Islamic regions such as Saudi Arabia have implemented expat levies on non-residents working within their borders from 2018.
For taxation purposes in the most common regions South African expats operate or immigrate to, you may want a better idea of the dates within which your annual taxes fall regionally, which are:
- South Africa: 1 March (year 1) – 28/29 February (year 2)
- Australia: 1 July (year 1) – 30 June (year 2)
- USA: 1 January (year 1) – 31 December (year 1)
- UK: 6 April (year 1) – 5 April (year 2)
- Canada: 1 January (year 1) – 31 December (year 1)
- Brazil: 1 January (year 1) – 31 December (year 1)
- New Zealand: 1 April (year 1) – 31 March (year 2)
- France: 1 January (year 1) – 31 December (year 1)
- Germany: 1 January (year 1) – 31 December (year 1)
- India: 1 April (year 1) – 31 March (year 2)
As a tax resident of South Africa, your taxes (due to your home country) will be levied according to the South African fiscal year, irrespective of the fiscal term of your new country of residence. However, your new country of residence MAY have its own criteria for considering your tax residency and taxes due. For many countries this is (like South Africa) determined by you residing in the region for at least 184 days per calendar year. There are exceptions, however. In Germany, for instance, you are considered a tax resident if you reside in the country for 6 months or more per calendar year. In France you will be considered a tax resident if you have a principal home (foyer), professional activity or centre of economic interest in France. For most countries, however, the determination of tax residency is a rather muddled grey area which is open to much interpretation.
Note, however, that other regulations, such as your annual transfer and foreign investment allowance run on a calendar year cycle if you are still a South African tax resident – which means your allowances run from 1 January to 31 December in any calendar year, and this bit is NOT open to interpretation.
Navigating the complexities of your tax obligations worldwide can therefore be a tricky process to manage. For individuals who are unfamiliar with their regional and international tax obligations – along with the terms, terminology, allowances and limitations could easily see you landing in hot water.
How To Avoid The Tax Pitfall
There is a simple solution to avoiding all the tax pitfalls – financial emigration. So, it may not be that simple, but for South Africans living abroad who are not planning to return home anytime soon, this solution could be truly beneficial.
Benefits of financial emigration:
- Avoiding double taxation on worldwide income.
- Investing savings or other funds in a local currency which may see you earning higher interest.
- Benefiting from local retirement incentives for reinvesting your funds in local retirement funds.
- Avoiding the administrative hassles of filing multiple tax and other submissions in various jurisdictions each year with different regulations, fiscal year(s) and taxation brackets.
Of course, you still have time to consider whether financial emigration is right for you – you always do. But if financial emigration (or tax emigration) is something which could be beneficial to you, it’s important to consult experts in this field as soon as possible as prompt action may be financially beneficial to you given the tax changes and time it takes to administrate certain changes and transfers. Luckily Rand Rescue is here, ready, able, and hoping to assist you with your financial choices.
As specialists in the field dealing exclusively with South African finances across borders, we’ve all the expertise, affiliations and accreditation to assist you with your financial enquiries and applications both in South Africa and abroad and can facilitate the transfers at more affordable rates than other service providers. We’ve a 100% success rate and with offices globally we’re not hampered by time zones or geographical limitations.
We can do a comprehensive policy search and liaise with financial services providers as well as regulators on your behalf. All our services are fully secure, confidential AND at no point will Rand Rescue have direct access to your policies or money, so your funds are never within our possession – we merely facilitate the process on your behalf.
Until your financial emigration is successful, or if you should not opt for financial emigration, it should be noted that any transfers from South Africa to another country will be subject to your R1 million Single Discretionary Allowance or R10 million Foreign Investment Allowance as approved by the Financial Surveillance Department of the South African Reserve Bank. These allowances are permitted for all South Africans (local and abroad) per calendar year, but it should be noted that the administration process could take some time, so applications for such transfers should be done in advance, usually before December of each year. And should you opt for financial emigration, you should note that the process could take between 8 and 22 weeks, depending on the requirements of your financial services providers, the scope of your financial portfolio and your current location.
If you are unsure how these allowances work, you can view more information from SARB here, or, make things easier on yourself and contact Rand Rescue for a free consultation with no obligation on your part!
During your consultation we’ll discuss the regulations, time-frames, requirements, concerns, and your options for moving your funds abroad which are most beneficial to your needs. Since we operate within the law and want our clients to make informed decisions, we’ll render this consultation at no cost and discuss all the requirements particular to your individual financial portfolio – which means you’re free to use our services or attempt the process on your own.