What is expat tax, and should I be worried?
There is a new tax amendment applicable to South Africans living and working abroad that comes into effect on 1 March 2020. It is quite a major change for expats in that it only allows a R1 million exemption and could result in double taxation for amounts exceeding that. Our accounting and tax consultants explain more.
While the expat tax amendment kicks in this year, it isn’t something that has come about suddenly. The initial amendment was submitted in 2017 and having gone through process is now firmly entrenched as part of the taxation law. The delay in implementation until 1 March 2020 is so that individuals have been given sufficient time and opportunity to get their tax affairs in order.
Expat tax and tax residency
SARS considers tax liability according to residency. This applies both to people who are physically residing and working in South Africa, and those living abroad but have South African residency. What this means is that if you’re working abroad, tax liability is not automatically nil, unless you meet specific requirements under the exemption clause. Note, this is specific to residents who typically return to South Africa several times a year. A person who resides outside of the country for a continuous period of 330 days or more is no longer a tax resident. Emigration will eventually release you of tax obligations; however, if you have recently moved abroad, it is a good idea to check with an accounting and tax consultant that there is no liability in the interim period.
Exemptions and expat tax
The main change in the tax law applies to a new amendment to the exemption for expats. Under the previous law any South African tax resident, living and working abroad for more than 60 consecutive days at a time and more than 183 days in total in a 12-month period, was exempt from paying taxes. This exemption still applies until 1 March 2020.
The new exemption law, which comes into effect from 1 March 2020, reads differently. The same time periods of 60 and 183 days apply; however, now only the first R1 million is exempt. Everything over and above that will be taxed. While R1 million may seem like a lot, when converted from foreign currency, the exemption quickly dissolves.
If expats are working in a country that doesn’t have a tax treaty with South Africa, they could now be liable for double taxation. The South African tax could be as much as 45% if the individual falls into the highest tax brackets and earns more than R1 million per year. There is, however, marginal relief in that the Income Tax Act allows for the person to apply for a credit for the tax paid in the foreign country. In other words, if you have already paid 25% tax on your income, the liability to SARS will only be 20% or whatever the balance is based on which tax bracket you fall into.
What is taxable under expat tax?
SARS applies taxation to more than just a base salary. Any taxable employee benefits including leave pay, overtime pay, commission, consulting fees, travel allowances, bonuses or company share schemes are considered fair game by SARS. This can be a major drawback for expats as salary packages often include allowances for housing, schooling, as well as flights back to South Africa once or twice a year for the family.
Should you be worried about expat tax?
If you have been living and working abroad for more than five years as an expat and comply with the statutory number of days cited in the exemption, or have emigrated some time ago, it’s unlikely you’ll be affected by these changes. Similarly, if you emigrated more than a year ago and are employed in your new country of residence, your tax obligations will be to that country, and no longer to South Africa
Should you have significant offshore investments, an option could be to apply for financial emigration. This involves a formal application to both SARS and SARB to be noted as no longer an “ordinary resident”. This is the only provision that has been noted in the National Treasury response document that ensures the R1 million tax rule does not apply and is the only formal route according to legislation for a permanent status change that can help protect against additional taxation on income.
Should you be concerned about the impact of this new tax law, consult a tax and business consultant. They can provide advice on the best way forward to protect your investments and your earnings as an expat.
Contact Grid Forensic Accounting regarding our Tax Management Consulting service and see how we can assist you. We solve, so you don’t have to.