21 Jan 2020

Changes to Foreign employment income

On 1 March 2020 the manner in which foreign employment income is treated by SARS will change.

There has been a great deal of hype and confusion regarding this change.  

Let’s unpack this in simple terms.

South Africa has a resident-based taxation system, meaning South African tax residents are taxed on their worldwide income. This has been the case since 2001.

Important to understand though is that the term resident is widely used. Various regulatory bodies in South Africa use the term “resident” such as SARS, the Department of Home Affairs and the South African Reserve Bank.  You may be referred to as a resident by the Department of Home Affairs as an example because you are a citizen of South Africa but a non-resident by SARS for tax purposes. The change in legislation only affects South African tax residents.  It has no impact on your Home Affairs status.

Determining tax residency requires a complex set of tests that need to be objectively applied case-by-case.

Prior to 01 March 2020 South African tax residents working abroad during any year of assessment received a full tax exemption on their foreign earnings as long as they met specific minimum requirements such as working under a contract of employment and beign physically present outside of the borders of South Africa in excess of 183 days in aggregate during any 12 Month period with more than 60 consecutive days.

The exemption never applied to sole traders and it never made reference to non-residents.

Starting 01 March 2020, only the first R1 Million earned in respect of foreign employment income will receive a tax exemption provided the same minimum requirements above are met.  In practice this means that any foreign employment income earned above the R1 Million tax exempt threshold will be taxed at the tax residents marginal tax rate during the specific year of assessment starting at 18%.

The most affected will be those employed in a low or no tax jurisdiction as they will have less foreign tax credits to offset the tax liability in South Africa. These jurisdictions also often have no double taxation treaties with South Africa.  

If you do live and work in a country that has a double taxation treaty with South Africa and you are a deemed resident of that country by virtue of this treaty this change in legislation may not affect you at all.

If you are affected you would likely also experience a change in provisional tax status after the new legislation takes effect as the tax on the amount over the R1 Million would need to be accounted for by submitting a February and August estimate each year in addition to the annual tax return.

Should you have any questions, please contact our offices.