To financially emigrate or not?
There is much conflicting information in the media about the taxation of South Africans on their foreign earnings and the impact of tax law amendments.
Currently, remuneration earned by South African tax residents for services rendered abroad is exempt from South African tax, if that resident has spent more than 183 full days (including a continuous period of more than 60 full days) outside South Africa in a 12-month period during which those services were rendered (‘foreign earnings exemption’).
With effect from 1 March, 2020, the foreign earnings exemption will only apply to up to R1 million of foreign income earned in a tax year. Income earned abroad exceeding R1 million will not be exempt under the foreign earnings exemption.
Many South Africans work and/or live abroad may want to ‘financially’ emigrate by placing their emigration on record with the South African Reserve Bank. They think that by taking this measure, their foreign income will not be taxed in South Africa. This move will not necessarily exempt them from paying tax in South Africa.
Who will be affected by the changes in the law?
It is important to understand the difference between becoming non-resident for tax purposes and non-resident for exchange control purposes.
The foreign earnings exemption, and its new cap, only applies to South African tax residents. If you are not a South African resident for tax purposes, you will not be affected by this amendment. People who have placed their emigration on record with the Reserve Bank may still be tax resident in South Africa.
South African tax residency
South Africa has a residence-based tax system. Residents are taxed on their world-wide income, except if specifically exempt, as is the case with the foreign earnings exemption.
A resident is defined by the Income Tax Act 58 of 1962 (ITA) as a person either:
- ordinarily resident in South Africa (the ‘ordinary residence test’), or
- a resident by their physical presence in South Africa (the ‘days test’).
To be defined as non-tax resident in South Africa, you must pass both tests.
Even if a South African tax resident in terms of the tests, you may still be regarded as a non-resident for tax purposes under the applicable double tax agreement (DTA) between South Africa and the country where you are working or living.
For helpful tips in determining your status in terms of the two tests, click here.
Double Tax Agreements
If you are defined as a South African tax resident by either the ordinarily resident or days test, the applicable DTA entered into between South Africa and the country in which you are living and/or working might regard you as non-resident in South Africa, and as resident in the other country. Make sure you check the terms of the DTA.
Section 6quat rebate
If you are a South African tax resident taxed in another country on the same income taxed in South Africa, section 6quat of the ITA provides for a rebate of the foreign tax paid against South African taxes. The rebate is limited to the South African tax payable on the foreign income.
So, for South African tax residents, all taxes paid abroad on income in excess of R1 million will be rebated against the South African taxes payable on that same income. Earnings exceeding R1 million will therefore not be taxed twice, but at the higher rate of South Africa or the foreign country.
Financial emigration through the Reserve Bank
The main reason for financial emigration is to break exchange control residence.
To financially emigrate, apply to the Financial Surveillance Department of the South African Reserve Bank with proof of the right, either by foreign passport or an appropriate visa, to live in another country.
Through the application, show your intent no longer to be permanently resident in South Africa.
By financially emigrating, you are strongly demonstrating the intent to have a primary residence outside South Africa and not to be ordinarily resident here.
Financial emigration is only a strong indication that you are not ordinarily resident in South Africa, and not a definitive factor. SARS takes various factors into account, and a person’s residency status at the Reserve Bank is only one of them.
Even if you can show that you are no longer ordinarily resident, you may still be tax resident because of number of days spent in South Africa, or of the applicable DTA between SA and the country where you are working.
Non-residents for tax purposes in South Africa do not pay tax on foreign sourced income.
The amendments to the foreign earnings exemption would therefore not be applicable to non-residents as the foreign earnings are never taxable.