Review: The Residence-based tax system – the ‘days rule’:
In order to understand the changes and the impact it is necessary to look back at the basis for previous expat tax rules, and what they were based on – the days rule:
- Expat tax was, and still is, based on the ‘residence-based tax system’ that was instituted in March 2001. In brief, this system meant that South Africa citizens were taxed according to where they lived, and for how long, rather than purely on where they earned their income. Under this tax system, foreign income became taxable if the citizen lived in South Africa for more than a certain period – making them liable for local taxation by virtue of their physical presence.
- This effectively left SA tax residents and expats free of obligation to pay tax to SARS on their foreign-earned income if they physically lived and worked overseas for more than 183 days of a year, with a minimum of 60 consecutive days.
The ‘days rule’ still applies for the first R1.25* million in income. This is thanks to an amendment to section 10(1)(o)(ii) of the Income Tax Act 1962 that also comes into effect on 1st March 2020:
SARS Income Tax Exemptions on EXPAT TAX – from March 2020:
From ‘the horse’s mouth’ so to speak – here’s what SARS has to say – READ MORE HERE
Provided ‘SA tax residents’ meet the days requirements for exemption, “the first R1* million of foreign employment income earned will qualify for exemption with effect from years of assessment commencing on or after 1 March 2020. Any foreign employment income earned over and above R1 million will be taxed in South Africa, applying the normal tax tables for that particular year of assessment.”
In effect, after R1 million (or 1.25 million as per the Budget Speech), this rate is 45%.
(*NB – note the difference from what was on the SARS website at the time of writing and what has been announced in the Finance Ministers’ Budget Speech of 25th February)
Unless there is a Double Tax Agreement DTA) in place between SA and the country where the income is earned, income is subject to taxation in both the country of origin and in SA. However, if there is a DTA you will still need to pay any difference in tax rate – with the maximum rate at 45%. This is going to be a hard one to bear.
If what you earn (over the threshold) is only subject to a 20% tax rate in the country you are living and working in, you will have to pay 25% tax on it again, to SARS – even if you never come home to SA. If you have the ‘Green Mamba’ passport – you must pay. This is thanks to the end of ‘financial emigration’.
No more ‘Financial Emigration’ as of March 2020:
It was previously possible to break tax residence. Also called ‘financial emigration’, this involved being able to prove that you didn’t live in SA anymore, and spent no less than 330 continuous days in a financial year outside of SA. That option is no longer available for expats from March 2020. In short, you will now need to prove zero interest or capital holdings in SA, zero intention of returning to SA to live, and give up your South African citizenship. This means that you must have a foreign citizenship to escape the long arm of SARS.
Of course, as with anything tax related, it can get in-depth and complicated, and there are ways to minimise impact. Please contact your tax experts at TAT for assistance with SA’s new expat tax requirements. Stay tax complaint and tax savvy! It’s the best way to protect your hard-earned income and ensure a trouble-free future for your local and foreign-earned estate.
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