Taxation of Foreign Employment Income – Individual’s Perspective

In March 2020, the South African amendment to the taxation of foreign employment income will come into action. This amendment brings into remuneration (taxable income) all foreign employment income for South African resident tax payers subject to an exemption of one million Rand. For an individual the solution to this challenge may not be as complicated as they think; and financial emigration is not necessarily the solution.

“There shall be exempt from normal tax any form of remuneration to the extent to which that remuneration does not exceed one million Rand in respect of a year of assessment and is received or accrues to any employee during a year of assessment by way of salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance including any income referred to in paragraph (i) in the definition of gross income in section one or an amount referred to in section 8, 8B or 8C, in respect of services rendered outside the Republic by that employee for or on behalf of any employer if that employee was outside the Republic.”

In deciding whether an individual may be impacted by this change in legislation and what their best options might be the following tests would need to be applied:

1. Whether they are South African tax resident as they would not need to disclose foreign employment income if they are not resident (this test would need to be applied for all years post their last South African tax submission). This test would require looking at both the following:
   a. Whether they are ordinarily resident in South Africa; and
   b. Whether they meet the Physical Presence Test
2. They would then need to consider whether their income might be excluded on the basis of a relevant double tax agreement (DTA) between South Africa and the relevant country in which the income is earned (e.g. clause 14 of the UK South Africa DTA by way of example)

If they are tax resident in South Africa under the first part and are not protected by a DTA then the legislation would apply to all their employment income (remuneration and any fringe benefits). 

It is important to note that even if the tests show they are not currently tax resident, if they choose to financially emigrate they would still need to consider the tests above each year as they may subsequently become RSA tax resident again. Financial emigration is a Reserve Bank process and not a tax process and while a SARS clearance letter is required for this process it does not trigger a de-registration for tax nor does it stop SARS from reviewing your residency each year. 

An individual may therefore face a number of choices:

1. Leave their position as is i.e. don’t change their financial emigration status, but make sure their tax affairs in South Africa are in order. This would likely entail submitting an annual income tax return in South Africa each year. If they are not RSA tax resident then they would declare no foreign income on the return unless they had income from a South African source (e.g. income from assets in South Africa). We would consider this the most pragmatic solution; or
2. Elect to financially emigrate. This would only be a financial emigration and would not, based on current legislation, impact their ability to hold a South African passport. If they do decide to financially emigrate a number of steps would follow:
   a. They would need to make sure their tax affairs are in order, submit all outstanding tax returns to SARS and apply for a tax clearance certificate and permission to financially emigrate.; and
   b. Submit an application to the Reserve Bank for financial emigration.

Importantly, financial emigration triggers a capital gains disposal – this would mean as part of the process they would need to calculate the capital gains on their global assets and declare these to SARS and pay any tax owing (This is a notional calculation and would not mean they have to actually dispose of all their assets). The benefit would be any future capital gains post the date of financial emigration would not be taxed in South Africa unless they subsequently became tax resident again.

Conclusion

There are various options open to individuals to manage the new legislation in relation to foreign employment income. Financial emigration is not however the best nor a clear-cut solution to the challenge. In fact, no steps can be taken that could completely remove any risk of SARS trying to rule the individual is ordinarily resident in South Africa. However, by taking some basic steps we believe it is possible for the individual to mitigate most of this risk albeit they may need to monitor this carefully on an ongoing basis.