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Financial Emigration - All You Need To Know

This has been a hot topic and we have been preparing for these changes for a while, but let’s break it down to understand why this is now important and needs to be considered per individual.

If we go back to what the act says about residency, in South Africa we have a tax-residency based system. This means that South Africans are subject to tax on worldwide income. You are a SA resident if you are ordinarily resident (defined in common law) in South Africa during a year of assessment.

So, the changes to section 10(1)(o)(ii) is applicable to South African residents working abroad and earning income.

Section 10(1)(o)(ii) says that if an employee is required to work abroad for a period (there are some more rules around this), and needs to be physically outside of the country, the employment income may be exempt if the individual has been outside of the country for 183 days in aggregate during any period of 12 months commencing or ending during a year of assessment. In the same 12 months, they must have been outside of South Africa for a continuous period of 60 calendar days.

Where an individual qualifies for the exemption, all remuneration earned in relation to the foreign employment duties will be exempt from tax in South Africa.

From the 1st of March 2020 the section 10(1)(o)(ii) exemption still applies but will be limited to one million Rand for the year of assessment.  

This is in line with the Reserve Bank requirement R1 million foreign spending allowance.

Further relief may be applicable to individuals working abroad if there is a double taxation agreement in place and certain income is of foreign source and foreign tax credits in respect of taxes paid on that income in the foreign country

Example:

Sally works in the United Arab Emirates for a SA employer and she has not formally immigrated. She earns a SA salary of R600 000 and receives an IRP5 every year.  She complies with all the requirements of section 10(1)(o)(ii) and the exemption does apply to her.

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Sally gets an increase and now earns R1.2 million per annum. Sally works in the United Arab Emirates for a SA employer and she has not formally immigrated. She complies with all the requirements of section 10(1)(o)(ii) and the exemption does apply to her.

No foreign source income was received and no foreign tax credits where deducted by the contracting state.

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Sally will be taxed from the 1st of March 2020 on the R200 000 taxable income earned. This means that for the period 1 March 2020-28Feb 2021 she will have to either pay PAYE monthly on the R200 000 or she will be liable to pay this in July 2021 when the tax season opens.

If she did pay any foreign taxes, the taxes will be able to be deducted from the tax owing, making the outstanding tax less. 

Now, let’s go back to residency test.

If a person is not in South Africa for the year of assessment (so the physical presence test can not be applied), a person is still regarded as South African if:

  • Primary home is in South Africa – this is driven by intention

  • Intention is to come back to South Africa

  • Employment is still in South Africa

  • Personal belongings are in South Africa

  • Family is situated

If ordinary residence cannot be determined, the physical presence test in the last 5 years needs to be considered and how much time has been spent within South Africa. It is important to understand that having SA citizenship or a passport does not make you a SA tax resident. 

If you have lived in Australia for years, your kids are in Australia and you don’t intend to come back to South Africa, then it is more likely than not that you are not tax resident in South Africa. The changes in section 10(1)(o)(ii) will have no effect on you and SARS can only tax non-residents on what they earn from South African source income within South Africa. You don’t need to financially emigrate to not pay tax.

Double taxation agreements are in place with a lot of countries. See here for agreements with different countries and South Africa

Most of these agreements were based on the same model and applies the rule that if you have worked in another country for 183 days or more per year, you should be taxed by that country in which you worked. 

So, if I worked in the United Kingdom for more than 183 days in a year, I will be taxed on my employment income in the United Kingdom.

Now let’s put all these rules together.
Example:

I have worked in Belgium for 4 months of the earning, earning R500 000 gross. On this salary, I have paid the equivalent of R50000 of taxes in Belgium

Then I worked in the Netherlands for another 4 months earning R600 000 gross. On this salary, I have paid the equivalent of R110000 of taxes in the Netherlands.

I then return home and because of the tax residency and the new amendments to section 10 (1) (o)(ii) my tax calculation will look like this:

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So, who should be concerned:

  1. Individuals classified as South African Residents working temporary abroad and who earn more than R1 million, especially if there isn’t a double taxation agreement in place.

  2. South African residents working abroad for short periods of time and earning more than a R1million and not paying enough foreign taxes or any taxes

To financially emigrate means that you change your status to being non-resident. You need to obtain a tax clearance and the status will be recorded with the South African Reserve Bank and SARS.

So, what this change has brought up is that SARS will use the law against people that work abroad and have not formally financially emigrated. We have noticed that on the new tax returns there are specific questions around residency and foreign income.

It is a good idea to speak to your financial advisor about whether it is a good idea to emigrate. And it really does depend on your situation and what your plans are for the future.