Tax lesson of working overseas

It is a common misconception that if a South African is working overseas they do not have to pay any local tax on their earnings.

Although some overseas income may be exempt in terms of the Income Tax Act it must be remembered that if you are classified as a SA resident you will be liable for tax on your overseas income.

A person will be treated as a resident for tax purposes if he or she is either ordinarily resident in SA, or meets the criteria of the physical presence test. The ordinary residence test takes into account various factors to establish the country which would be most accurately described as the individual’s real home. The physical presence test looks at the number of days spent in SA over five years.

Foreign income will be exempt from SA tax if the person works as a crew member or officer of a ship which is engaged in the transport of passengers overseas, or in the prospecting, exploration or mining for any minerals. This exemption will only apply when the person was outside SA for more than 183 days during the tax year.

In addition, any salary earned for services rendered outside the country on behalf of an employer will be exempt where that person was outside SA for more than 183 full days during any 12 month period that started or ended during the year of assessment. This exemption does not apply to income made through contracting – which would be fully taxable.

National Treasury has had its eye on this exemption since 2017 with the initial aim being to repeal it fully. The main reason for this proposed amendment was to curb double non-taxation of foreign income such as when an individual’s income was not being taxed in either SA or the foreign country.

“The current proposal by National Treasury to repeal the exemption fully has now softened slightly and from March 2020, the first million earned by a person who meets the criteria for exemption will be exempt, and any income earned above this will be taxed at the normal rates. The individual will also be entitled to reduce his resultant SA tax liability by offsetting some or all of his foreign tax paid where applicable.

It is important to remember that for a person who formally emigrates or ceases to be a tax resident there may be significant capital gains tax implications. The person will be seen to have sold off all his assets, with the exception of immovable SA property at market value on the date that he ceased to be a resident and will therefore be liable for tax on the capital gain on those assets.

Jeremy Burman is an advisor at Private Client Financial Services, a division of Private Client Holdings