From 1 March 2020, South African residents who spend more than 183 days in employment outside the country will be subject to taxation, in South Africa, on any foreign employment income that exceeds R1 million (provided that all other conditions are met).
The true cost of this amendment on the pockets of ordinary South African expats
The South African expatriate population consists mainly of students and skilled individuals who seek opportunities to gain international experience. Countries such as Australia, the United Kingdom and the United Arab Emirates have proven to be attractive employment destinations and are known to host some of the largest South African expat communities.
It is commonly known that, while many expats look forward to better job prospects and an increased standard of living, the vast majority are still required to provide financial assistance to their families who remain behind in SA. Ordinary South African expats may, therefore, be faced with a further financial burden on the basis that they may be required to settle an additional tax bill.
Consider the following scenario:
Ms. X is a 38 year old South African tax resident who renders employment services in Dubai. In addition to satisfying her own costs of living, she regularly transfers amounts to her elderly South African parents to assist them in meeting their obligations.
Ms. X does not derive income from any other sources and does not qualify for any additional tax deductions.
Her SA tax position can be analysed as follows:
SA Tax Position:
SA Tax Position:
|Earnings||AED 400 000||AED 400 000|
|Estimated rate of conversion||AED 1: ZAR 4.06||AED 1: ZAR 4.06|
|Earnings in ZAR||R1 624 000||R1 624 000|
|Less: Foreign service exemption||(R1 624 000)||(R1 000 000)|
|Taxable income||R0||*R624 000|
|Normal tax payable||R0||R174 567|
|Less: Primary rebate||(R14 220)||(R14 220)|
|Less: Foreign tax credits||(R0)||(R0)|
|Tax payable for the year||R0||R160 347|
*This calculation was prepared using tax rates applicable to the 2020 year of assessment.
From the above it is evident that, going forward, Ms. X will be require to set aside a substantial amount to cover her SA tax expense. More specifically, expats working in other zero or low tax jurisdictions may suffer a similar fate when it comes to their South African tax costs.
The volatile nature of the economy further raises concerns regarding exchange rate fluctuations. An expat may end up with a higher tax liability as a result of a weaker Rand. In addition, the extent to which foreign tax credits may be claimed (in instances where the expat has already paid tax on the same income in a foreign jurisdiction) is unclear at this stage and may cause a sense of uncertainty as it relates to an expat’s true tax position.
Both National Treasury and the South African Revenue Service have expressed their commitment to working through such uncertainties before the effective date.
Inflated tax costs together with a high cost of living, compulsory social security contributions (for which no credits are granted in SA) and the maintenance of a family may render an expat in a less than favourable financial position. Adequate financial and tax planning is, therefore, essential.
RSM has a dedicated team of tax professionals who are able to expertly advise on these matters. You are welcome to reach out to us should you wish to discuss ways in which you can manage your South African tax exposure.
Tax Compliance Consultant, Johannesburg