In­di­vid­u­als given a sport­ing chance of tax break

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

MANY of us suf­fered the mis­for­tune of watch­ing THAT game on March 25 against New Zealand. It all started well enough, but by the time JP Du­miny was out try­ing to play a cut shot to a ball pitched in line with his off stump and De Vil­liers was run out, many of us felt that we had read this script be­fore.

Then came the news that Graeme Smith did not come home with his team and in­stead went on hol­i­day to Ire­land “for tax rea­sons”. What was all that about? Ru­mours have been fly­ing about po­ten­tial tax avoid­ance and other ne­far­i­ous ac­tiv­i­ties.

On this score, how­ever, our Proteas cap­tain is en­tirely blame­less. There is a pro­vi­sion in the In­come Tax Act (sec­tion 10(1)(o)(ii)) that pro­vides for an ex­emp­tion from South African tax in re­spect of re­mu­ner­a­tion re­ceived by an em­ployee for ser­vices ren­dered out­side SA. This ex­emp­tion only ap­plies if the em­ployee was out­side the coun­try for a pe­riod or pe­ri­ods ex­ceed­ing 183 days in to­tal dur­ing any 12-month pe­riod and for a con­tin­u­ous pe­riod ex­ceed­ing 60 full days dur­ing that 12-month pe­riod and his ser­vices were pro­vided dur­ing that pe­riod or pe­ri­ods.

It is likely that to qual­ify for this ex­emp­tion Smith was merely mak­ing sure he com­plied with the day count set out in this pro­vi­sion and, in par­tic­u­lar, the 60 con­tin­u­ous days re­quire­ment. So there’s no rea­son to sug­gest he has done any­thing other than com­ply with our tax law.

This is a sec­tion specif­i­cally de­signed to ex­empt in­come from tax in the cir­cum­stances pre­scribed. From a tax per­spec­tive there is noth­ing wrong with tim­ing a wel­learned hol­i­day to com­ply with the pro­vi­sions of the law and en­sure that you qual­ify for an ex­emp­tion pro­vided in the In­come Tax Act.

If this ex­emp­tion does not ap­ply then South African res­i­dents such as Smith need to pay tax on their world­wide in­come al­though they do get a tax credit for any for­eign tax suf­fered. This means they should not end up pay­ing dou­ble tax.

In this re­gard, many coun­tries tax sports­men and women who par­tic­i­pate in sport­ing tour­na­ments. The pro­vi­sions of the Model Dou­ble Tax Treaty al­lows the source state, that is the coun­try where the tour­na­ments are lo­cated, to tax the in­come of such sports­men or women. The res­i­dent state (SA) then needs to pro­vide a tax credit for the for­eign tax im­posed by that source state.

In­di­vid­u­als other than sports­men or women are more for­tu­nate. If a South African res­i­dent goes to, say, Ire­land and pro­vides ser­vices in Ire­land then the Model Dou­ble Tax Treaty pro­vides that Ire­land may not tax such in­di­vid­u­als in re­spect of em­ploy­ment in­come de­rived while in that ju­ris­dic­tion if they are present in that coun­try for less than 183 days in any 12-month pe­riod and are paid by or on be­half of an em­ployer which is not a res­i­dent of that ju­ris­dic­tion.

Such in­di­vid­u­als may then es­cape all tax on their in­come since the ju­ris­dic­tion where they pro­vide the ser­vices may not tax them and SA (where they are tax res­i­dent) may also ex­empt them from tax un­der the ex­emp­tion set out in sec­tion 10(1)(o).

If there was any truth in the ru­mour that Smith was con­sid­er­ing leav­ing SA and cap­tain­ing Ire­land in the next World Cup then this would have dif­fer­ent tax con­se­quences. In par­tic­u­lar, if a tax res­i­dent of SA ceases to be so res­i­dent, he is deemed to dis­pose of all of his as­sets at mar­ket value and cap­i­tal gains tax is payable on any gains aris­ing from this deemed dis­posal.

This is be­cause when a per­son ceases to be a res­i­dent of SA this may be the South African Rev­enue Ser­vices’ last chance to get some tax from such in­di­vid­u­als. In par­tic­u­lar, once these in­di­vid­u­als are no longer res­i­dent for tax pur­poses in SA they are only taxed on in­come de­rived from a South African source or cap­i­tal gains de­rived from im­mov­able prop­erty in the coun­try.

These non-res­i­dent in­di­vid­u­als may also pay re­duced tax in the ju­ris­dic­tions to which they em­i­grate. For ex­am­ple, the UK is fa­mous for its “res­i­dent, but not domi­ciled” rules in terms of which in­di­vid­u­als es­sen­tially only pay tax in the UK on in­come de­rived from a UK source or in­come which is re­mit­ted to the coun­try.

Hint to Smith: if you are think­ing of tak­ing up the cap­taincy of an­other coun­try, con­sider Eng­land. We have no doubt you will do a bet­ter job than that other left-handed open­ing bats­man with a South African sur­name and your tax bill may well be lower than if you go to Ire­land.

Peter Dachs and Bernard du Plessis are direc­tors in ENS’s tax divi­sion.

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