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The taxation of foreign income for expats is becoming an increasingly confusing area of tax compliance – throw buzz words into the mix like ‘double tax agreements’ and ‘financial emigration’ and you would be forgiven for wanting to put your head in the sand. Despite the perceived perplexity of the situation compounded by the many recent changes in tax laws and misinformation being bandied about the expatriate community, it is actually pretty straightforward. The question, though, is how do you know that your taxes are being correctly calculated and whether you are getting the right advice?
Knowing your tax status
South Africans working or living abroad need to check their tax residency status and ensure they are adhering to the relevant criteria as the amendments to the Income Tax Act have been fully enacted. This has a significant impact on all South Africans working abroad who are still ‘ordinarily resident’ in South Africa for tax purposes, i.e. your primary home is in South Africa.
The determination of whether you are ordinarily resident in South Africa can be complex and differs for each individual’s specific circumstances. For example, an airline pilot who lives and works in Dubai is not subject to South African Income Tax, even if he has a South African passport and owns a property in South Africa. This is because he does not live in South Africa on a permanent basis.
Changes to the Income Tax Act
New tax law states that South African residents who are ‘employed’ outside of South Africa, but are out of the country for periods exceeding 183 days, 60 days of which are consecutive, in any 12-month period, as of March 2020, now qualify for a R1,25 million exemption from South African income tax on foreign income earned. Any foreign employment income earned over and above R1,25 million is taxed in South Africa by applying the normal tax tables for that particular year of assessment. While this tax incentive may seem generous, it is worth noting that all earnings, including allowances and fringe benefits, must be declared. This can very quickly bring you up to that R1,2 million limit.
Danielle Luwes, head of taxation at Hobbs Sinclair, says that in her experience most taxpayers working in foreign lands are paying some form of local tax or PAYE. “Generally these foreign taxes paid, which are deductible against South African income tax payable, together with the R1.25 million exemption, result in the taxpayer not being liable for any further taxes in South Africa. This is conditional upon the taxpayer spending the specified number of days outside of South Africa for the relevant tax period,” she explains.
Double Tax Agreements
Concerns remain that the new tax laws will result in a taxpayer having to pay double tax on foreign employment income. However, the purpose of Double Tax Agreements (DTAs) between countries is to eliminate double taxation on income. South Africa holds DTAs with most other countries and this provides relief for taxpayers who receive income in both South Africa and a foreign country. In other words, if you pay tax in a foreign country, that tax can be either be deducted against South African tax payable or that income is excluded from South African income tax, depending on the terms of the DTA.
While it may appear that financial emigration is a viable tax mitigation strategy, in most cases it is questionable whether this is a worthwhile option as it requires severing financial ties with South Africa and payment of capital gains tax on worldwide assets. Financial emigration from South Africa is also not necessary in order to establish an offshore stream of income. For most South African-based business owners it is often wiser to use their South African assets as a platform to build an offshore revenue stream, which, correctly structured, will not be taxable in South Africa. “Whilst the grass may look greener on the other side, the challenge of establishing a new business in a foreign country is extremely difficult,” cautions Luwes. “However, diversifying your income away from South Africa without emigrating, may be wiser.”
Get the right advice
The bottom line is that it is vital to have an effective and well-thought-out tax strategy that ensures tax compliance for any given situation or individual, as there is no one-size-fits-all approach. Acquiring the services of a tax specialist who has your best interests at heart, understands your specific circumstances and can offer sound advice on what options are available to you, will go a long way to saving you your hard-earned cash, ensuring that you are tax compliant and not having to pay unnecessary taxes on your expat income.