Picture: 123RF/RAZI HUSIN
Picture: 123RF/RAZI HUSIN

From March 2020, many South Africans living and working abroad will find themselves at the centre of new tax legislation.

Aimed specifically at anyone earning more than R1m a year while working abroad, the legislation will see them pay up to a 45% marginal tax rate on anything they earn over and above that first million. This so-called “expat tax” has many worried, raising serious questions among the millions of South Africans living and working abroad.  

What’s changing? 

Currently, SA tax residents living abroad and earning remuneration in respect of services rendered outside of SA for or on behalf of any employer, is exempt from tax in SA, provided that the individual is outside of SA for a period or periods exceeding 183 full days (60 of which must be continuous days of absence from the country), during any 12 month period. There is currently no limitation on the foreign employment income exemption.

As from 1 March 2020, these requirements will still apply, but only the first R1m earned from working abroad will be exempt from tax in SA. Accordingly, any foreign employment income earned over and above this amount will be taxed in SA, at a maximum marginal tax rate of 45%.  

Who’s affected?

Only SA tax residents who earn remuneration in excess of R1m, in respect of services rendered outside of SA, for or on behalf of an employer (which could either be a resident or non-resident employer). The R1m exemption will thus provide relief for lower- to middle-income South Africans working abroad, provided, of course, that they meet the requirements referred to above.

In addition, the tax amendment will have an impact on companies that second SA employees abroad for work, as these companies will now be required to adhere to the legislative change.

What does the new tax mean for SA’s economy? 

Practically, very little. While Sars may see marginal gains in the short term, these are likely to be mitigated by an increase in the number of South Africans opting to cease tax residency and/or financially emigrate. 

Why is Sars implementing these new regulations?

Historically, the purpose of introducing the tax exemption was to prevent double taxation of an individual’s income between SA and the host country. However, the application of the exemption has created opportunities for double non-taxation of remuneration derived from foreign services rendered by SA tax residents, where the host country imposes little or no tax on employment income.

To ensure that the tax system promotes the principles of fairness and progressivity, it was proposed and subsequently legislated that foreign employment income earned by a resident should no longer be fully exempt. 

What can those affected by the new tax do about it? 

Given the angst among expatriates living and working abroad, many believe that financial emigration is the quick and easy solution to “escape” the amendment to the foreign employment income exemption. However, taxpayers should be aware that formally emigrating from SA, is not necessarily the “silver bullet”, as this process bears its own consequences. 

In many instances, SA nationals living and working abroad could likely find themselves in a favourable position where they have technically ceased tax residency from an SA perspective, in that they may be considered ordinarily resident in the foreign country. 

In other words, where expatriates live and work abroad and they are able, based on objective factors, to prove to Sars that their “centre of vital interests” (that is, personal, family, economic relations and habitual abode) has shifted to the offshore jurisdiction, they will likely not be regarded as being tax resident in SA and will not be affected by this amendment. 

However, from a cash-flow perspective, these individuals should be aware that the cessation of tax residency from SA could make them  liable for capital gains tax at a maximum rate of 18%.

In all other instances, before expats make “knee-jerk” decisions to either cease tax residency in SA and/or financially emigrate, they should consult a trusted advisor to evaluate their current tax residency status in SA and the offshore jurisdiction specific to their particular facts and circumstances and so mitigate any adverse tax and/or exchange control consequences.

• Gaskell is group MD at the Geneva Management Group.