Tax Changes For South Africans Living Abroad

SARS changing the taxation on foreign-earned income

South Africans the world over are waiting with bated breath to see whether the tax changes they’d been warned of for the past two years will become a reality and just how much of a reality it will become for them personally.

Hopefully you’re not one of them—and by one of them, we’re of course referring to those saffas abroad who are “waiting”. Indeed, not only have many of the tax changes already been implemented, but the entirety of the legislative amendment will come into effect on 1 March 2020. It’s neither an “if” or a “when”, since you know it’s coming and you know when!

SARS is instituting the new legislation to prevent widespread non-compliance by South Africans earning foreign income. Research conducted by the Treasury and SARS had found that most South Africans living or working abroad have simply left South African shores without formalising their financial affairs and without concern for their status as South African taxpayers.

Since these taxpayers are still on book with SARS, they have tax obligations towards the South Africa, and should they be deemed tax residents of their new country of residence it may well be possible that they are currently sidestepping tax obligations there as well. Furthermore, with many South Africans deliberately deceiving SARS by stating that they are unemployed or citing that they earn less than they actually do, the revenue service has found it necessary to clamp down on tax evasion.

What is the current legislation?

Of the South Africans abroad who do still file their South African tax returns, many are benefiting from Section 10(1)(o)(ii) of the South African Income Tax Act which provides for tax relief on foreign earned income.

This section utilises a 183/60-day test to determine an individual’s eligibility for tax exemption and eligibility is dependent on the following rules:

  • The individual must be a South African tax resident
  • The individual must have a formal employment contract with a foreign employer
  • The individual must spend/have spent 183 days of a consecutive 12-month period outside South Africa while rendering services to a foreign employer.
  • 60 of the 183 days must have been served continuously.

The following are therefore reason for exclusion from the exemption:

  • Individuals who are self-employed, contractors, freelancers or perform casual work abroad
  • Individuals who reside within South Africa but render services to foreign companies
  • Individuals who have spent parts of the 183 days in the 12-month period on holidays, travel or other leisure activities while not employed by a foreign employer (though requisite weekends, sick and leave periods are included).

What are the new taxation regulations?

The current exemption still applies, but it has been capped at R1 million with a 45% taxation applied on any amounts exceeding this for income acquired outside South African borders.

The tax amendment will apply to those who have not changed their tax residency status and those who are temporarily abroad.

The amendments have also clarified the tests to determine tax residency of individuals such as Section 10(1)(o)(ii) mentioned above and SARS has noted that it will be more firm in their determination of a person’s tax residency given that so many individuals are evading their tax obligations.

It is therefore not merely a matter of a tax amendment, but also SARS and the SARB’s renewed vigilance in ensuring compliance which has many an expat spooked.

What does an income of R1 million really mean?

Many South Africans aren’t necessarily concerned with the new tax amendment, believing that their salaries falling below R1-million per annum would safeguard them from taxation. But tax practitioners warn individuals to keep in mind that “income” does not necessarily denote “salary”.

In fact, SARS views certain perks, fringe benefits or incentives as part of your overall income. If your new employer has, for instance, provided housing, relocation costs, security and flights, these costs will form part of your “worldwide income”, as could additional benefits offered by your employer such as transport, healthcare, subsidised meals, membership fees, tuition and so forth.

It would therefore be wise to consider exactly how far from the R1-million threshold you really are and anticipate changes to your income which may push you over the margin.

A rudimentary example:

Given the stipulations above, let’s create a hypothetical scenario and see how someone earning a salary below R1 million could be affected by the new taxation regulation.

Mr. Jackson is a South African who has recently moved abroad with his wife, child, two dogs and cat. His employer has offered him a salary which equates to R800 000 per year, has covered his relocation costs (including things like visas, clearance, flights, transport, packing, shipping, innoculations, food, accommodation, permits, insurance and other sundries), and offers him additional perks and incentives over and above his salary.

The costs of these additions are: 

  • Relocation costs of R300 000 
  • A once-off training course valued at R20 000
  • Monthly healthcare valued at R20 000 (R240 000 per annum)
  • A housing subsidy of R10 000 per month (R120 000 per annum)
  • Transportation subsidy of R5 000 per month (R60 000 per annum)
  • Health club membership valued at R1 000 per month (R12 000 per annum)

These perks and benefits add up to R752 000 per annum.

 

Theoretical formula for calculating your worldwide income:

Salary + perks = Overall worldwide income

R800 000 + R752 000 = R1 552 000

 

Using the formula above, Mr Jackson’s worldwide income therefore includes his R800 000 annual salary plus the R752 000 in perks and benefits he’s received over a 12-month tax period, placing his overall income at R1 552 000 for the year.

Though Mr. Jackson had assumed that he would not be liable for South African taxes, given his R800 000 salary, SARS would now require him to pay 45% on the R552 000 income which exceeds the R1 million threshold.

Mr. Jackson therefore owes SARS R248 400 for the year. Given that the fringe benefits and perks he’d received are not monetary sources of income which he can use to pay for the taxes, he will need to recover those funds from his R800 000 annual salary. The deficit essentially loots his take-home salary down to R551 600.

Of course, these amounts and calculations are merely hypothetical,  since not all perks and benefits will be considered part of your income. It’s also true that many South Africans leave home shores with but the clothes on their backs, making relocation far less expensive, and more still have relocated ages ago. Other expats don’t receive additional perks on top of their salaries. But the example above does paint a stark scenario of the devastating knock to one’s livelihood which you may not have anticipated.

What if you reside in countries with limited or no taxes?

Unfortunately the no-tax rules in foreign territories will not safeguard you from taxation unless you have financially emigrated.

Zohra de Villiers of KPMG explains that a South African living in Dubai and earning an income of R3 million can currently take home their entire salary, given that the region is tax-free. With the new taxation regulations, this individual will now be liable for R742 974 in taxes to SARS on the R2 million earned above the R1 million threshold. That is an enormous chunk of your income and it’s therefore not surprising that many expats are quite disgruntled over the tax amendments.

What’s the solution?

Most South Africans who have been abroad for a while and don’t plan on returning will necessarily want to unwind their tax obligations to South Africa if they have not yet done so.

To unwind your tax obligations in South Africa you will need to change your tax residency. The success of such tax-residency change hinges on the findings of the ordinarily resident test, which trumps the physical presence test. This is due to the fact that a person may still be considered a natural resident of South Africa even if they weren’t physically present in the country.

In order to determine your tax residency, SARS and the SARB will consider the following:

• Intention to be ordinarily resident in the Republic

• The natural person’s most fixed and settled place of residence

• The natural person’s habitual abode, that is, the place where that person stays most often, and his or her present habits and mode of life

• The place of business and personal interests of the natural person and his or her family • Employment and economic factors

• The status of the individual in the Republic and in other countries, for example, whether he or she is an immigrant and what the work permit periods and conditions are

• The location of the natural person’s personal belongings

• The natural person’s nationality

• Family and social relations (for example, schools, places of worship and sports or social clubs)

• Political, cultural or other activities

• That natural person’s application for permanent residence or citizenship

• Periods abroad, purpose and nature of visits

• Frequency of and reasons for visits

Of course, being deemed ordinarily a resident of another country will make you liable for taxes in your new country, but SARS stipulates that, “the tax treaty might include a core definition of “resident” which differs from the definition in 24 Section 108(2) … or the application of the tie-breaker rules might result in the natural person being held to be exclusively a resident of the other country.”

There may therefore be situations where determining residency and tax obligations may be a bit muddled and the conclusion could take some time.

Options Available To Saffas Abroad

1. Restructure your foreign income

This may seem like a ridiculous decision, but certain individuals may opt for salary or benefit cuts provided they have a comprehensive scope of their total income. If there’s a scenario where an individual’s perks and benefits would put their income above the R1 million threshold, they could opt for restructuring their income in such a way that it is less detrimental to their pocket. This is, of course, a short-term solution, as it would necessarily leave your income at an indefinite plateau. 

2. Returning home

Some South Africans are taking the plunge and returning home. This is especially true for individuals who have short-term contracts or work permits and those who had planned to return all along. Wrapping up your contract a bit earlier to dodge the expat tax bullet may be financially sound for some.  It should be noted, however, that taxation is hardly ever a motivator for returning to South African shores for those who have emigrated with families or have their sights set on a more permanent stay abroad.

3. Waiting it out

Many South Africans working abroad are simply waiting it out to see if and how the new tax regulations will affect them. Given that SARS has been lax with penalties and prosecution in the past, some believe that they still have a few years to evade the tax agency. Others are holding their breaths in hopes that SARS will turn a blind eye to other sources of income. And then, of course, there are those individuals who have evaded their tax obligations all along and simply hope to continue in this carefree (careless) manner.

4. Applying for a double taxation directive

Individuals who are abroad for longer term contracts and intend to return to South Africa can apply for directives under a double taxation agreements. This is only applicable where South Africa has an agreement in place with the country where the individual resides/works. The directive is put in place to mitigate double taxation for individuals who operate under different jurisdictions

5. Financial Emigration

Those South Africans who will be affected by the legislative changes and wish to stay abroad indefinitely will necessarily opt for financial emigration. This process allows individuals to unwind their assets and financial obligations and de-register as tax residents of South Africa. The process doesn’t affect their South African passports, but simply authorises SARS and the Reserve Bank to exempt the individuals from any further tax obligations towards South Africa.

Which option is best?

While option 1 provides a temporary solution which could buy you some time, it does not offer any long-term benefits as it comes down to self-sabotage in the long run. Option 2, on the other hand, is only a solution for those who have no intention of prolonging their stay abroad and had planned to return to SA all along.

We don’t need to go explain to you why option 3 is a bad idea. Any action or activity which is unlawful could have dire consequences for you and your loved ones. But perhaps we should explain why this is even more true for expats when the tax amendment kicks in.

Indeed, SARS had struggled to target tax evaders in the past. The slack had been ascribed to a lack of resources, shortfalls in reporting and errors in data-augmentation and integration. But that was then, and this is now. The Common Reporting Standard (CRS) for the Automatic Exchange of Information (AEOI) which was developed by the Organisation for Economic Co-operation and Development (OECD) in 2014 officially kicked off in South Africa in June 2017, with the last of the 109 signatories having launched CRS in 2018. 2019 will therefore be the first year that all the countries who had agreed to CRS will share income and tax information internationally. Evading taxes will therefore become an incredibly hard feat for expats. Furthermore, in addition to it being unlawful, individuals found guilty of tax evasion could:

  • Be liable for back taxes and penalties
  • Face criminal prosecution and jail time
  • See their residency or visas forfeited due to nefarious activity
  • See double taxation on their income had they not completed their income tax correctly in their current country of residence

Consider also that any activity on foreign accounts which doesn’t correlate with your income tax will trigger an audit note with SARS. This means that you may be audited even if you personally deem yourself a non-resident for tax purposes.

Option 4, of course, is preferred for those who wish to return to South Africa after long-term contracts, but the process can be quite protracted and should be completed each year.  Furthermore, it is only applicable if South Africa has a double taxation agreement in place with the country from which you are earning your income.

It stands to reason then that the only logical move would be to emigrate financially.

Melissa Brink, Structured Solutions analyst at Bravura, states that, “Individuals should be mindful of the fact that while they may not be considered to be tax resident in South Africa, they will still be subject to the exchange control regulations in South Africa if they have not formally emigrated for exchange control purposes.”

Since tax residency is determined on a case-by-case basis, it’s necessary for individuals to arrange their affairs in such a way that it is clear they have emigrated and always intended to emigrate without the intention of returning, as SARS could still deem a person “ordinarily resident” for a particular fiscal year even if the person has been gone for a while.

In the case of Cohen v CIR (1946 AD 174, 13 SATC 362), the court considered that although the taxpayer was not physically present in South Africa for an extensive period of time, he had returned to South Africa frequently and that “ordinarily resident” was not based purely on the specifics of the year of assessment in question, but a person’s life before and after his/her purported emigration. The taxpayer was consequently deemed an “ordinarily resident” even without their physical presence in the country in the year of assessment.  Individuals who have been abroad for several years could also be deemed tax residents of South Africa once more should they spend prolonged periods in South Africa.

The only solid route for tying up your assets in South Africa would therefore be financial emigration.

Why the rush?

Although the new tax regulations will only apply in full from 1 March 2019, you should keep in mind that financial emigration could take a while.

Depending on your assets left in South Africa and how up to date your filing and documentation is, the financial emigration process could take between 6 and 12 weeks. In some rare cases where individuals had attempted parts of the process on their own, you may even have to start the application from scratch which would lead to further delays.

Determining one’s tax residency could also be a protracted process seeing as the criteria for determining residency are variable and unique to each case.

You should also consider the “fiscal years” relevant to South Africa and your new country of residence. In South Africa the fiscal year runs from 1 March until 28/29 February of the following year, in the UK a tax year runs from the 6th of April until the 5th of April the following year whereas in the USA a tax year follows a calendar year (1 January to 31 December). In Australia the fiscal year runs from 1 July until 30 June of the following year.

Your tax residency for different jurisdictions could would therefore follow different fiscal years and changing your status could become confusing. Should there be a strong overlap, you may find yourself having to file tax returns for two jurisdictions in a fairly short period. Though this will not necessarily be financially hampering (you would hardly pay much if you file tax returns one month into becoming a tax resident of another country) the administration may leave you quite vexed.

Getting the process started as soon as possible will therefore serve to benefit you in the long run and ensure that you won’t be liable for penalties and double taxation in future.

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