Individuals given a sporting chance of tax break
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.