South African “expat tax” explained

In March 2001 South Africa changed from a source-based to a residence-based tax system for individuals. This meant South African tax residents working abroad would be subject to tax on their worldwide income.

South African “expat tax” exemption

South African tax residents who worked overseas for more than 183 days (of which 60 were consecutive) were exempt from paying income tax on their foreign earnings, but as of March 2020 that has changed. Now, only the first R1.25 million earned as foreign income is exempt from tax and an “expat tax” will be charged on any income earned above this. However:

• You must have spent more than 183 days outside South Africa in any 12-month period and
• During the 183-day period, 60 days must have been spent continuously outside South Africa
• You must be an employee earning a salary

This absence from South Africa must be work-related and this exemption will only be allowed once declared in your personal annual tax return.

Practically, this means that any foreign income earned above this R1.25 million will be taxed in South Africa at the relevant marginal tax rate. If any income is earned in South Africa, this will be added and the total will be taxed accordingly.

While R1.25 million seems like a generous threshold, this amount doesn’t only include your stated basic salary but also any allowance, bonuses and fringe benefits such as housing, security and flights that are part of the employment packages. All of these things can quickly add up to the R1.25 million threshold. Keep in mind that exchange rate fluctuations can have a dramatic effect on this amount.

Determining tax residency in South Africa

There is a common confusion between obtaining a residency certificate from your host country and being a resident for tax purposes with SARS. Having a residency certificate does not automatically exclude you from being a tax resident of SA.

You will qualify as a tax resident in South Africa if you meet either criteria for the ordinarily resident test or the physical presence test. While the physical presence test is an evaluation of the number of days spent in South Africa, the ordinarily resident test is determined on a case-by-case basis. Our tax emigration specialists can assist you with determining your status and ensuring you remain tax compliant with SARS.

Double taxation agreements: How they affect South African expat tax

South Africa has Double Taxation Agreements (DTAs) with 81 countries which can help you avoid being taxed twice on the same income. Some of these countries include the UK, Australia, USA, UAE, Japan, Sweden and Thailand.

DTAs are internationally agreed pieces of legislation and South Africa holds these with various countries to define the taxing rights they have over expat taxpayers. The DTAs ensure that a taxpayer is not unfairly taxed in both South Africa and the corresponding country involved in the agreement.

Where a taxpayer is registered as tax resident in both countries and there is a DTA in place, then the DTA will determine where and how a taxpayer must pay tax on income received. It should be noted that relief, in terms of a DTA, will need to be applied for each year. This doesn’t guarantee that all foreign earnings will be excluded from taxation in South Africa by the taxpayer. Even if you are successful in obtaining a DTA residency certificate, you are still obligated to file a return to SARS.

In practice this means, if you are in a situation where you find yourself tax resident in both South Africa and in the country where you are working and there is a DTA in place, the DTA can be used to force your tax residency status to be shifted by planning your links (and thus answers for the DTA tie breaker tests) between South Africa and the other country.