Recent changes in the Income Tax Act will have serious implications for South Africans working abroad. They have been advised to prepare themselves for when the law to comes into effect in 2020.
Foreign Employment Income Exemption will come to an end on 1 March, 2020. This amendment of the Income Tax Act was announced in 2017. South African expats currently spending more than 183 days outside of the country in total, and for a continuous period of 60 days within a consecutive 12-month period, will qualify for the exemption only until the implementation date. This means that South African tax residents abroad will be required to pay tax of up to 45% of their foreign income – where it exceeds R1 million – from 1 March, 2020. This will not only be limited to income but include benefits which forms part of the employment package such as travel, housing and even security.
As a knee-jerk reaction, the option of financial emigration has been suggested by some tax practitioners and financial advisors. Unfortunately, there is currently a lot of misinformation about financial emigration as financial emigration does not necessarily exempt you from paying tax in SA. Despite emigrating, you are could still liable to pay tax on any South African-sourced income and may also be found to be a tax resident if you generate income from these sources after emigrating, as exchange control residence and tax residence are two different issues, even if your emigration was to show the intention to break your tax residence. Also, expats who have not been submitting tax returns in SA – although they are still South African tax residents and should have done so – are in debt to SARS and financial emigration will not fix their tax compliance issue in retrospect.
There is also the issue of failed emigration.
Should an expatriate return to SA within five years after financial emigration, SARS will deem it a failed emigration and all taxes for that period will be liable. Also, the exit charge for tax emigration from a capital gains perspective, is at a minimum effective rate of 18% on worldwide assets.
What you need to know
South Africa has a residence-based tax system, which means that residents are taxed on their worldwide income, regardless of where that income was earned. Even though you’ve worked abroad for several years, if your tax residency is assigned to South Africa, you are required to declare your foreign earnings to SARS and pay income tax. If your tax residency is assigned overseas, you are declared a non-resident and only income that is sourced in South Africa will be taxed by SARS.
Financial Emigration is the formal process to declare oneself as a non-resident for tax and exchange control purposes in South Africa. The process demands that one has met all requirements under the Income Tax Act, to ensure that one is a non-resident in accordance with South Africa’s tax residency tests and ensures compliance with all exchange control regulations for non-residency.
Your tax residency status is determined by SARS by way of two tests. These are the ordinary resident test and the physical presence test. If you meet the requirements of these tests, you will be classified as a South African resident for tax purposes.
The ordinarily resident test result is determined by the location of your permanent home, as well as where your assets and family are based. If these all point to South Africa, you will then be deemed a South African tax resident, regardless of the amount of years you’ve spent overseas.
The physical presence test is based on the amount of time you spend in South Africa. To pass this test and be deemed a resident for tax purposes, you need to be present in South Africa for 91 days or more a year, 91 days or more in each of the preceding five years and 915 days in total during those five preceding years of assessment.
If you spent less time in the country than this, it will be deemed that you are not physically present in South Africa. You will still be required to pay tax on your income generated through South African based assets though.
This is a complex issue and you are advised to seek specialist advice if you are impacted by this new law. American Dream is aligned with Regional Centres for the EB-5 Investment Programme, with specialists – situated in Johannesburg, Cape Town and Durban – who are ready to advise and assist you through all the touchpoints in your emigration journey.