Many South African tax residents render services abroad for a period of time during their lives.
At present, the Income Tax Act exempts income received by a South African tax resident, during any year of assessment, if:
- the income is in respect of employment services rendered outside South Africa; and
the individual was outside SA for a period or periods exceeding 183 full days in aggregate during any twelve-month period; and
- such individual was outside SA for a continuous period exceeding 60 full days during that twelve-month period.
There is presently no requirement that tax is payable in another country for this exemption to apply. It is therefore possible that, in certain circumstances, no tax is paid is any jurisdiction, in relation to periods worked outside SA.
National Treasury is of the view that this exemption is overly generous, particularly in instances where an individual has worked in a foreign jurisdiction with a low or zero personal income tax rate (i.e. so-called tax havens).
As such, National Treasury has confirmed that, with effect from March 1, 2020, only the first R1m of foreign service employment income will be exempt from tax. Income received over and above the R1m threshold will be subject to tax, in SA, at marginal rates.
As a result of the new “expat tax” law, some South Africans are looking into financial emigration. There is a lot of misinformation among the South African expatriate community about the amended expatriate tax law and the process of financial emigration, according to Melanie Browne, financial emigration process specialist at Tax Consulting SA.
Financial emigration is the formal process to note oneself as a non-resident for tax and exchange control purposes in South Africa. This formal process is done through the SA Revenue Service (SARS) and the SA Reserve Bank (SARB).
“Undergoing the Financial Emigration process, proves one’s intention to permanently reside outside of SA, which coincides with SA tax residency tests,” explains Browne.
Current credit and debit cards are not allowed to remain open, for instance, and credit cards will have to be paid off and closed.
Furthermore, only one “authorised dealer” can be used per application due to the complexity of monitoring this type of application. Thus, bank accounts with other banking institutions will need to be closed.
Financial emigration does make provision for withdrawals of lump sum values from retirement annuity funds as one has ceased tax residency.
Income such as interest and rental on fixed property may continue to be earned after the financial emigration process, however, these funds must be substantiated by the production of supporting documents, such as rental agreements.