What are the Benefits of the South African Tax Laws for Expats?
Alex de Wit
Personalised financial planning, affordable investment solutions and award-winning management services for expatriates.
by Infinity
What is Tax in South Africa, and How Does it Work?
On Mar. 1, 2020, the South African Revenue Service (SARS) introduced some changes to the Income Tax Act, which will affect all South African expats that earned over 1 million rands annually.
Officials made changes to section 10(1)(o)(ii) of the Income Tax Act, now nicknamed the ‘expat tax’. Previously, a tax resident from South Africa who was working overseas that did not meet the physical presence requirements criteria in the country was exempt from tax on any foreign employment income they earned. Now, South Africans who spent more than 183 days outside the country within 12 months (including a continuous period of more than 60 full days) paid no tax in South Africa. This also meant that if they lived in a tax-free jurisdiction, they paid no tax on foreign employment income at all. But this is no longer the case with the revisions.
How Does the New Law Affect a Tax Resident in South Africa?
As of Mar. 1, 2020, the exemption has been removed. A South African tax resident living and working abroad will be considered ordinarily resident in South Africa, a status equivalent to the British concept of domicile. While not defined in South African law, a person will be deemed to be ordinarily resident if South Africa is the country to which that person will naturally, and as a matter of course, return to after their wanderings. It could be described as that person’s usual or principal residence or their original home.
A South African tax resident classed as ordinarily resident in South Africa will now be taxed on all foreign employment income over the 1 million rand threshold, including any benefits received as part of a salary package such as flights, children’s school fees and housing costs. For the highest earners, that could mean paying taxes of up to 45%.
South Africa also has Double Taxation Agreements (DTAs) in place with some countries to avoid an employee having to pay employment income tax twice. You will find a list of them?here.
Suppose you are a tax resident present in South Africa or working in Asia. In that case, the tax changes could have severe impacts on your financial situation, especially but not only if your country of residence does not have a DTA in place with South Africa (Vietnam is one example). However, there are other options to mitigate your expat tax bill in the country, which include the following:
Financial Emigration From South Africa
Financial emigration is a formal legal process that involves residents cutting all tax ties to South Africa. It enables expat tax residents in South Africa to retain their citizenship and South African passport. However, it informs the authorities that they are no longer ‘ordinarily resident’ in South Africa and therefore not subject to SARS tax laws. There has been a considerable increase in financial emigration demands since the changes to the Income Tax Act for South African tax residents were announced.
Financial emigration may sound simple, but it has significant implications for an employee with South African assets who intends to keep them. When an expat tax resident registers financial emigration and applies for a tax clearance certificate with SARS and the South African Reserve Bank, SARS regards those assets as sold and charges capital gains tax on them. Conclusively, although financial emigration is suitable for certain situations, it does not alleviates one’s tax burden regarding foreign income.
On the plus side, financial emigration can protect South African tax residents against currency fluctuations and enable South Africans who are ordinarily residents to transfer their retirement savings offshore and reinvest them in a more tax-efficient way.
South African tax residents who are considering this option need to weigh the pros and cons carefully. For example, it may not be financially prudent to do this if you have valuable assets in South Africa.
Moving Back to South Africa
For some who have been paying no income tax in South Africa, the new revisions to the South African tax law may mean that they can no longer maintain the lifestyle they have enjoyed outside of the country and will be forced to return home in the process. However, with the?economy in South Africa?as it is with high unemployment and little economic growth, South Africans may struggle to find work.
Set Up Structures To Limit Liability
Tax-efficient structures in South Africa can be set up to protect foreign employment income earned and assets. One such option would be setting up an offshore company in a tax-friendly jurisdiction and invoice from there; however, beware of the strict legislation surrounding this structure.
Another possibility is to create an investment portfolio within an international retirement plan to minimise tax exposure in the country while also mitigating capital gains tax on the capital investment. With the proper investment structure, a South African resident can be exempted from paying tax on their earned interest. In addition, these arrangements are often exempt from estate duty, so they double up as an efficient estate planning tool.
As a resident of South Africa, tax efficiency is a complicated field, and many factors need to be considered when taking any of the above courses of action. This article merely scratches the surface of the options a resident of South Africa has and their implications. They should always look for professional advice from a qualified tax advisor who is well versed in South African tax law before making any significant financial decisions. Please?get in touch with us?if you need any advice.
More On Tax in South Africa
Tax in South Africa is a complicated topic. South Africa’s current tax rules dictate that you are subjected to South African tax if you live or work in the Republic or are considered a tax resident in the country even if you live in a different country. The amount you need to pay for tax purposes depends on various factors.
Who Should Pay Tax in South Africa?
You need to pay tax in SA if you:
The Double Taxation Agreement in South Africa
A double taxation agreement is signed by two tax treaties, such as South Africa and another country, to avoid double taxation. South African expatriates should be aware of the relevant double tax agreement to their situation to ensure double tax relief.
There are 81 countries in total that have double tax treaties with South Africa, including the United States, the United Kingdom, Australia, Thailand, Japan, Sweden, and Saudi Arabia.
When there are no treaty provisions, one-sided relief on foreign-source all income is available in some cases as an R1.25 million foreign employment income exemption. This relief is also provided as a credit for foreign taxes paid, but it is limited to the smaller amount of the actual foreign tax liability as well as the South African tax payable on the foreign income.
Who is classified as a non-tax resident and tax resident of South Africa?
There are two tests that you need to meet to be classified as a South African tax resident:
The physical presence test involves the number of days that you physically reside in South Africa within the year of assessment as well as the five years of assessment before the year of assessment.
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If a person complies with the relevant requirements, they are officially considered a resident of the Republic in terms of tax purposes for the year under consideration.
Additionally, if a person meets the requirements of the physical presence test but resides outside of the Republic for a continuous period of 330 days at least, they are not regarded as a South African resident from the date on which the person stopped being physically present.
To be classified as a non-resident for South African tax purposes, you must fail to qualify according to the requirements above or, alternatively, adhere to the requirements that allow you to be considered exclusively tax resident of a different country under a tax treaty with South Africa.
Changing your tax residency status means submitting an application and delivering the correct disclosures to the South African Revenue Service in order to cease South African tax residency. Every case will then be evaluated according to its individual merits.
How Can You Neutralise Paying Tax on Foreign Employment Income?
You will be required to submit a formal application to the South African Revenue Service to change your tax residency status to state that you are a non-tax resident. This process would typically involve submitting documentation and a formal submission to SARS as an official non-tax resident.
Once your status has been changed, you are a non-resident and will not be required to submit a tax return to SARS on your foreign income.
However, it is worth noting that both tax residents and non-tax residents are required to pay tax to SARS on any income that originated and is generated in South Africa. For example, even if you reside elsewhere, you have to pay tax on the rental income of a South African-based property.
Taxable Income in South Africa
The Republic uses a taxation system that is based on residency. This means that residents are required to pay tax on their worldwide income, whereas non-residents in South Africa are taxed on South African-sourced income.
The personal income tax bracket was increased by 5% during the 2021 National Budget, which is higher than inflation. This increase is an attempt to recover the economy after the influence of the pandemic in the previous year.
This increase in the tax bracket results in R2.2 billion in tax relief, which will primarily benefit the lower to mid-income residents.
Should You Pay Capital Gains Tax?
Capital Gains Tax applies to all trusts, individuals, and companies. This tax is payable to the South African Revenue Service.
An official South African tax resident is responsible for paying Capital Gains Tax on discarding all assets in and outside of the Republic.
Capital Gains Tax is not set at a fixed rate in SA, meaning your taxable capital gain is added to all your other taxable income for the relevant year. This total amount will be taxed appropriately, depending on which tax bracket the amount falls under.
South African Inheritance Tax
There is no tax cost on inheritance in South Africa, which includes capital gains tax purposes, but there are duty fees levied on the estates of the deceased. This amount can become substantial, so it is advised that South African residents should consult a professional regarding their business and personal interests and the distribution of their assets after death.
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