Tax Exemption Relating to Foreign Employment Income

Tax Exemption Relating to Foreign Employment Income

Tax

This post explains the rules around offshore employment for South African citizens. HRTorQue are experts in personal tax. If you would like to chat to an advisor please contact us using “personal tax” in the subject line.

Tax exemption relating to foreign employment income

We have received a recent stream of queries regarding offshore employment and the tax consequences thereof for South African citizens. More and more South African citizens are accepting employment or considering offers from offshore companies. The fact that these people are investigating the tax implications of this move prior to accepting offers is a very responsible move that can limit an unwanted tax surprise later on. To assist such interested parties we have set out the law as it currently stands and then answered one of the more common questions regarding this practice.

In terms of South Africa’s ‘residence-based’ system of taxation, the general rule is that income earned from the rendering of services anywhere in the world, by a tax resident of South Africa, will be included in their ‘gross income’ as defined in Section 1 of the Income Tax Act. Certain exemptions are however provided for, including Section 10(1)(o) of the Act.

The exemption provided under Section 10(1)(o)(ii) of the Act applies in respect of services rendered outside South Africa for, or on behalf of, any employer, as long as the individual is outside South Africa for a period or periods exceeding 183 full days (calendar, not working days) in aggregate, during any twelve month period commencing or ending during a tax year. In addition, the exemption will only apply if, during the 183 day period, there was at least a 60 day continuous period of absence from South Africa. Before continuing it is important to note that this exemption does not apply to self-employed individuals or independent contractors.

There is a responsibility on the taxpayer to prove their absence from South Africa for a period complying with the requirements of s10(1)(o)(ii) of the Act, as well as the fact that such absence was attributable to them rendering services outside of South Africa. It is important to note that there must be an employment relationship, with the taxpayer having a valid employment contract with the employer. In addition the taxpayer must ensure that a copy of their passport is available for scrutiny by SARS. It is also advisable that the taxpayer maintain a running schedule of the days that they are outside the country. This schedule will show SARS where the 183 day and 60 day continuous period of absence has been met.

Recently we have been asked an interesting question relating to a taxpayer who provides maritime services to offshore oil installations in Nigeria. He works on a week on / week off basis and with the distances that need to be travelled he spends most of his down time in Nigeria. The taxpayer asked whether downtime and leave etc. spent offshore would be included in the calculation of the 60 day continuous period identified in Section 10(1)(o)(ii).

SARS Income Tax Interpretation Note 16 deals with this matter saying:

“Weekends, public holidays, vacation and sick leave spent outside the Republic are considered to be part of the days during which services were rendered during the 183 day and 60 day periods of absence.”

It would therefore not matter whether the taxpayer (in full-time employment) was working, on leave or off sick whilst offshore. As long as the taxpayer is still out of the country, these days would be included when calculating the 183 day or 60 day continuous periods.

It is imperative that the taxpayer is aware of all these requirements and that the information is retained in the format acceptable to SARS. Taxpayers intending to work offshore are urged to consult a registered tax professional if they have any doubts as to their tax status. These tax professionals are also best placed to correctly reflect these earnings on a resident taxpayer’s tax return.