TROUBLED WATERS: TAX ON THE HIGH SEAS

SOMETIMES, those who have been living the corporate life decide to leave it all behind for a life working aboard luxury yachts.

Whatever the reason, there are those out there who work and live on sea-going vessels.

Forgetting the sun, sea and foreign lands you’re likely to encounter while navigating the globe, there is the tax benefit afforded to such seafarers.

The Income Tax Act makes provision in section 10(1)(o)(i) that any officer or crew member of a ship who spends 183 days outside the Republic will have their remuneration exempt from income tax. Talk about a cherry on top.

Before you pack up and head for the nearest harbour, there are of course strict requirements to ensure such a tax exemption is applicable.

One such requirement is that the remuneration received must be as compensation under an employment. Naturally, when the SA Revenue Service (Sars) comes knocking, an employment agreement will serve as proof thereof.

Independent contractors do not qualify for the exemption. Which leads to a growing trend.

When those who seek a captain’s role want to take the next step in their careers, certain requirements must be fulfilled. One is the need for a prospective captain to spend around 240 hours in command of a vessel. Solitary control being the main factor.

Fact is, on even a 12-hour day, that’s 20 days of the captain needing to be absent. Given the nature of the industry, the number of days at sea and the limited time in which a captain is absent, the 240 hours become a rather significant mountain to climb. Especially where the prospective captain remains on the same boat consistently.

What many sailors are resorting to is charter contracts. A yacht owner will engage the individual to transport their vessel from, let’s say, the Mediterranean to the Caribbean. For a fee of course. Thing is though, this is usually done through an agreement or a handshake. Are you seeing the problem yet?

Without having concluded an employment agreement with the owner of the vessel, the charter income earned is not subject to exemption. Fully taxable and in need of declaration. In our experience, many (if not most) of the sailors we encounter are unaware of this fact.

When advising our clients on the liability, there are those who feel that there is no cause for concern and no funds should be declared.

Given that Sars has undertaken to exchange information globally and with payroll and personal audits on the rise, it really is only a matter of time before those who have not declared their seafaring income are caught in Sars’ net.

The amendment to the foreign income exemption and the resistance of taxpayers to the change will lead to a more stringent audit of taxpayers’ affairs. All foreign income earners will be in the same boat.

Nautical puns aside, there is truly cause for concern for those who have not declared their income to Sars.

Which is why, for those sailors who approach us, we typically engage in a full tax diagnostic review of their affairs. Once we’ve established that a long-term lifestyle is the intention, we undertake a planning structure to facilitate the optimal tax position and correct any historical shortcomings.

Christopher Renwick is a senior tax attorney at Tax Consulting SA.