Tax Relief Strategies for South African Expats to Protect Their Overseas Earnings

We would like to present Peter X, who is currently enjoying a rewarding life abroad. However, this comfort is backed by his strong work ethic. With tax season on the horizon, it’s essential for him to pinpoint the tax relief options available for his foreign-earned income, as these could significantly affect his finances.

As per expatriate tax specialists, depending on Peter’s earnings and the country he resides in, he might be eligible for a tax refund close to R47,000 for the current tax year, or a considerable R184,984.04. The specifics hinge on which of the two exemptions he selects when filing his South African tax return.

Learn more at: South African expats in the UK must act before the tax net closes

If Peter takes advantage of the exemptions designated for tax residents, specifically under section 10(1)(o)(ii) of the Income Tax Act, he can anticipate the first amount. This expatriate exemption permits him to waive nearly R185,000 in tax liabilities in South Africa, provided there exists a Double Taxation Agreement (DTA) between South Africa and his foreign tax jurisdiction.

These amounts are not to be overlooked, as they highlight the importance of investigating the various tax relief options accessible to South African expatriates in order to protect their overseas income.

In essence, this revolves around South Africa’s residence-based taxation framework, administered by the South African Revenue Service (SARS) under the Income Tax Act. The central factor is determining who is classified as a tax resident. Tax residents of South Africa must report and pay taxes on their global income and assets to SARS.

This tax residency status is vital for individuals leaving South Africa; maintaining tax residency entails ongoing liability to the tax authorities for worldwide income. Expatriates wishing to avoid permanently giving up their tax residency after completing the formal financial emigration process should explore either the expatriate exemption or DTA relief. Both avenues could lessen tax responsibilities, but understanding their unique implications is crucial.

Many assume that the expatriate exemption and DTA relief are the same, but they perform distinct functions within tax law.

Expat Exemption: This is available to tax residents under certain conditions. As of 1 March 2020, the exemption restricts relief to R1.25 million per year of assessment.

A DTA is a legally binding agreement between two countries aimed at avoiding the double taxation of income, establishing rules that dictate tax rights between the two jurisdictions.

Expat Exemption: Section 10(1)(o)(ii)

When applied correctly, SARS cannot tax the resident on employment income up to the R1.25 million cap. Any income exceeding this threshold will be subject to marginal tax rates in South Africa. To utilize this exemption, the following conditions must be met:

• The taxpayer must be a tax resident of South Africa;
• The income must be derived from remuneration;
• The remuneration must be for services rendered;
• The services must be performed “outside the republic”;
• The taxpayer needs to provide verification of an employment relationship (e.g., employment contract); and
• The taxpayer should spend more than 183 days outside of South Africa, with 60 consecutive days required.

It’s vital to recognize that the reporting of worldwide income and assets is mandatory for SARS. Any earnings generated beyond what is outlined in the employment contract as “income” will be fully taxable in South Africa.

Even if a taxpayer’s earnings fall below the threshold, they are still obligated to submit a tax return with SARS. The responsibility lies with the taxpayer to furnish all pertinent information to SARS, as the agency will not automatically categorize this income as non-taxable. Disclosure is necessary, and the exemption must be applied correctly for it to be valid.

When to consider DTA relief

Individuals who do not meet the aforementioned requirements or those with significant income may benefit from terminating tax residency through a DTA — provided such an agreement is in place between South Africa and their host country. Unlike the expatriate exemption, this relief does not impose a R1.25 million cap. The termination is a temporary solution compared to financial emigration, which marks a permanent cessation of tax residency.

It’s vital to appreciate that the mere existence of a DTA between South Africa and the host country does not ensure relief. Considerations include:

• Is the expat also recognized as a tax resident in the host nation?
• Is there an intention for the expat to permanently return to South Africa in the near future?
• Do their personal circumstances fall in line with the “tie-breaker” criteria outlined in the corresponding DTA?

Once these factors are established in the host country, the taxpayer can inform SARS of their intention to relinquish their South African tax residency under the DTA.

Comparison of the two approaches

SARS can still track you from abroad

Recent changes in South African tax laws reveal a robust approach to monitoring expatriates. SARS has amplified efforts by establishing a specialized “Foreign Employment” unit tasked with overseeing South Africans working outside the country.

It is critical for expatriates to grasp their tax obligations in South Africa and remain compliant with SARS as stipulated in the Income Tax Act. Many expatriates mistakenly believe that leaving the country frees them from tax obligations; however, SARS continues to uphold taxing authority over their income, except where exemptions apply.

By staying informed and seeking professional guidance, expatriates can proficiently navigate their tax responsibilities, minimizing potential liabilities and fostering a positive relationship with SARS while enjoying their overseas experience.

John-Paul Fraser is a tax attorney, and Chavaughn Phillips is an expatriate tax specialist at Tax Consulting SA.

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