How Does South Africa Expat Tax Law Work?

If you are one of the 900,000 or so South African expats living abroad and know little about tax laws, this article is for you! We’ve put together helpful information about the income tax process in South Africa so you can work out where you stand concerning taxation. While every effort has been made to ensure that the information outlined here is correct, Infinity is not a taxation specialist. This article is best used as a starting point or reference to understand South African tax systems better. If you need to pursue this further, we can refer you to one of our partners who will give you expert advice based directly on your situation.

What Are The Factors That Affect South African Expat Tax?

Are You a South African Tax Resident?

Since 2001, the tax process or system in South Africa has operated on a residency basis, as opposed to the source-based system used previously in the country. It is essential to determine whether or not a resident of South Africa is classed as an official resident, as this can have far-reaching implications on expat tax. It is entirely possible to live abroad for many years yet remain a South African resident. However, expats often are not aware that this is the case.

For expat tax purposes, the definition of a resident is any natural person who is ordinarily resident in South Africa or who meets the requirements of the ‘physical presence test’. What complicates the issue is the lack of a definition of an ordinarily resident in South Africa, a term open to interpretation under common law.

To simplify what is a complex issue, if you have lived and worked abroad but intend to return home to South Africa at some point, you would usually be classed as ordinarily resident. Because even if your stay abroad may last for decades, an intention to return makes it temporary, which results in you being labelled as ordinarily resident.

Taxation for South African Tax Residents

Under the residency system, South African residents are taxed on their total global income. This includes having to pay capital gains tax. However, suppose you have relocated and are working abroad. In that case, it is entirely possible to be a tax resident in another country if you spend more than 183 days in a tax year in a foreign territory (or whatever period applies according to that country’s residence criteria). Some South African tax residents wonder if this means they would be paying tax for both countries.

South Africa has a double taxation agreement with many countries to avoid the situation where a tax resident is required to pay in both countries. South African expats can find a list on the government’s website to know which nations have double taxation deals with their home country. If there is no double tax agreement between the country you work in, South African residents may pay tax twice (see exemption below).

It would be best if you never assumed the existence of tax treaty relief – it is essential for South African expats to adhere to processes and protocols laid out by the South African Revenue Service (SARS). Tax residents must claim relief, and SARS will confirm whether or not an individual qualifies.

Foreign Employment Income- Income Tax Exemption

In addition to relief via a double tax treaty, expat tax exemption may apply under the foreign employment income exemption, according to the Income Tax Act. This exemption relates to foreign earnings from employment only and applies if the following criteria are met:

• You spend more than 183 full days outside South Africa over 12 months;
• You spend more than 60 consecutive days outside South Africa, and services are rendered outside South Africa during the 12 months.

Authorities enforced new legislation on 1st March 2020 about this exemption. From that date, the exemption will apply only to the first one million rands of remuneration on foreign employment income.

Foreign Tax Credits

If you are a resident in South Africa, you can also claim a foreign tax credit against income tax payable in South Africa. This credit will also apply to foreign taxes paid on South African-sourced taxable income and is subject to certain limitations. You will find further information on the SARS website here.

Renouncing South African Residency

Suppose you have moved abroad and had no intention of returning to South Africa. In that case, you can renounce your residency, which means you would not have any physical presence in the country. Renouncing your residency is an extreme step to take and should be considered very carefully before proceeding to protect your investment. Note that a capital gains tax’s exit charge is payable based on deemed disposal of worldwide assets at market value on the day before renunciation of a tax resident.

Once residency is renounced, a South African tax resident is only taxed on income sourced in South Africa, e.g. rental income from a property or remuneration for work carried out or services rendered to South Africa (even if that work is given as remuneration elsewhere).

It is worth noting that exchange control limitations are placed on South African tax residents who renounce their residencies. Assets and capital which can be taken out of the country are limited to the following allowances:

• A foreign capital allowance of 20 million rands per calendar year for a family unit or 10 million rands per calendar year for a single tax resident.
• A one-off allowance of 1 million rand
• Personal and household effects up to an insured value of 2 million rands, including caravans, motorcycles, motor vehicles, coins, trailers, stamps, and minted gold bars

Approval is required from the exchange control authorities for exports above these allowances. The remaining cash balances or capital payments from the sale of assets must be kept in a dedicated and authorised ’emigrant capital account’ but can be used in South Africa.

There is one recommendation for South Africans who plan on returning to South Africa and are looking for suitable retirement planning solutions. This process is a pension scheme that is a tax-efficient way to save for retirement and is favourable to bringing money into South Africa from a personal investment portfolio. If that is of interest to you, please get in touch today at info@infinitysolutions.com – we’d be happy to help.

Q&A About South African Expat Tax

How can I invalidate paying income tax on foreign employment income?

Given that you meet the relevant criteria, you have to submit a formal application to the South African Revenue Service requesting to change your tax residence status from being considered exclusively tax resident to being a non-tax-resident of South Africa. Such an application includes submitting the appropriate documentation along with a formal submission form to the South African Revenue Service as a non-tax resident.

As soon as your tax residency status is officially changed to a non-tax resident and you have submitted your first return as a non-tax resident, you’ll be deemed a non-tax resident going forward, and you won’t have to submit a tax return to the South African Revenue Service on any foreign income you earn in a country other than South Africa.

However, it is worth noting that regardless of whether you are considered a tax resident or a non-tax resident in South Africa, you will still be required to pay South African tax on any South African sourced income, in alignment with the Income Tax Act. For example, if you own a property in South Africa and earn rental income on that property, you will be subject to South African tax payable on that income.

What implications are involved in breaking my tax residency status?

Capital gains tax will be triggered once you break your tax residency status with the South African Revenue Service. The reason for this is that you are required to dispose of all South African assets, except for immovable property, when you break your South African tax residency. As a result, it is expected that there will be enough available liquidity to fulfil your capital gains tax responsibilities that may come into play as soon as you break your tax residency status.

Here are some examples of assets that will deem you liable to pay capital gains tax on:

• Shares
• Artwork
• Gold and Kruger coins
• Investments of particular natures, such as unit trusts, but excluding investments such as retirement savings
• Any assets that aren’t considered to be immovable property

What Exactly are double taxation agreements in South Africa?

Two tax treaties sign double taxation agreements, like an Asian country and South Africa, for example, for favourable tax purposes. South African expats need to be well-informed of the relevant double tax agreement to their residence situation to benefit from double tax relief and avoid double taxation.

South Africa currently has double tax treaties with a total of 81 countries, including the UK, the US, Thailand, Australia, Saudi Arabia, and Sweden.

In cases where there are no treaty provisions, there may be one-sided relief available on income tax on foreign employment income earned of up to R1.25 million. Such relief provisions can also be given as a credit for foreign taxes paid by South African expatriates. Although, the relief is limited to the lesser amount of the actual foreign tax liability and the tax that needs to be paid on foreign income in South Africa.

What is involved in Financial Emigration?

Financial Emigration will always entail specific criteria that need to be fulfilled before the process can commence. Financial Emigration refers to the formal process of changing your tax residency status to being a non-tax resident for exchange control and tax purposes in South Africa.

The process of financial Emigration was designed and implemented to ensure that individuals meet all the necessary requirements under the Income Tax Act to make sure that the South African tax residency tests deem one as a non-tax resident. This process further ensures compliance with all the regulations regarding exchange control for non-South African residents.

The process of financial Emigration involves:

• Getting a tax clearance certificate from the South African Revenue Service.
• Going through the process of converting a South African account into a blocked account.
• Obtaining a good letter of standing from the South African Reserve Bank.

Financial Emigration isn’t a method of tax residency status breakage as of March 2021. Moreover, Financial Emigration is not a method of negating tax in South Africa on foreign employment income.

What is involved in the ordinarily resident test?

Establishing whether a person is ordinarily resident in South Africa will take into consideration the merits of each individual case along with the principles put in place by case law. The following factors will be considered when deciding if a person is ordinarily resident in South Africa.

NOTE: The following is meant to serve as a guideline rather than an exhaustive list:

• The person is settled and fixed in South Africa
• The person intends to be ordinarily resident in South Africa
• The person spends most of their time in South Africa and exercises their habits and mode of living here
• The person’s business and personal interests and family is in South Africa
• Economic and employment factors
• The status of the person in South Africa and any other foreign country, like whether they are an immigrant, for example
• The nationality of the person
• Where the person’s personal belongings are located
• Cultural and political activities
• The duration of a continuous period spent abroad and the reason and nature of the visits.
• Any applications for citizenship or residence
• Social and family relations

How does taxable income in South Africa work?

South Africa’s tax law uses a residence-based tax system, meaning South African residents are liable to pay tax on worldwide income, and non-residents are only required to pay tax on South African-sourced income.

In 2021, the income tax bracket was raised by 5% with the purpose of recovering the economy after the pandemic’s impact. The tax bracket increase results in significant tax relief, but it will primarily be in favour of residents with low to mid-sized incomes.

How does inheritance tax in South Africa work?

There isn’t a tax cost imposed on inheritance in the Republic. This includes capital gains tax purposes. However, duty fees will be levied in the deceased’s estate. Because these fees can become significant, South African residents are advised to seek professional help regarding their business and personal interests to potentially relieve their tax burden.