Increased tax liabilities of up to 26% for South African expats

Are you aware that from 1 March 2020, foreign earnings over ZAR1m are to be taxed at South African rates?  This applies to you, if you are classified as a ‘physically present’ or ‘ordinarily resident’ South African tax resident.

As a South African expat living in Singapore, the maximum income tax rate you can expect to pay is currently 22%.  However, if your salary falls into South Africa’s tax bracket, you will have to pay the difference of 26% to the South African Revenue Service (SARS) from March 2020.

Background to the tax changes

In 2002, South Africa moved to a worldwide basis of taxation, meaning that foreign earnings and benefits from 1 March 2002 would be liable to tax in South Africa, even if not remitted to South Africa, for ‘physically present’ or ‘ordinarily resident’ South Africa tax residents.

Although South African citizens overseas will often break the first test, the latter is a common law principle, which is particularly difficult to lose. For this reason, when the tax system changed, the foreign earnings exemption was put in place to protect those people with earned income overseas from taxation in South Africa, known as section 10 of the Income Tax Act 1962.

To qualify for this exemption, an employee needs to have spent more than 183 full days (including a continuous period of more than 60 full days) outside of the country working, in any 12-month period. If this requirement isn’t met, then the individual is taxed on worldwide earned income.

In the 2018 Budget the new finance minister Malusi Gigaba agreed to maintain the exemption, not on an unlimited basis, but with a ZAR1 million allowance, so that only overseas earnings in excess of this allowance would become chargeable, from 1 March 2020.

Though one further budget in February 2020 will happen immediately before implementation, most financial professionals consider these changes inevitable, given the economic status of South Africa.

Breaking tax residency – Physical presence

The SARS physical presence test determines whether a South African is tax resident, based on physical presence in the country.

The day count test considers whether the tax payer spends in South Africa:

  • 91 days in total during the year of assessment under consideration
  • 91 days in total during each of the five years of assessment preceding the year of assessment under consideration, and
  • 915 days in total during those five preceding years of assessment.

However, if an individual passes the physical presence test, they will be taxed on their worldwide income and gains in South Africa.

Breaking tax residency – Ordinary residence

Ordinary residence is judged not by a day count but by an actions, connections and intentions test. This indicates that the purpose, nature and intention of the taxpayer’s absence beyond the period in question must be established to determine whether a taxpayer is still ordinarily resident. It is therefore this test that most are caught by.

What are your options?

For some individuals whose earned income is in excess of the ZAR 1million exemption, the options will be to:

  • Establish Non-Ordinarily Resident Status and ensuring that you do not fall foul of the Physical Presence Test
  • Formally emigrating financially from South Africa
  • Rely on the Provisions of the Singapore / Republic of South Africa Double Taxation Agreement, although this has many practical difficulties
  • Accepting the changes and paying the additional tax bill

What does it mean to financially emigrate?

Financial emigration is the process to conclude your financial affairs when leaving South Africa to settle in another country.  It simply means your status, for exchange control purposes, changes from resident to non-resident. It can be applied after leaving South Africa and can be back dated five years.

Emigration does not affect your South African birth right, citizenship or the right to retain your South African passport, because once a South African always a South African.

How can AAM Advisory help you?

Contact your AAM Financial Planner now or email [email protected] to arrange a no obligation meeting to discuss how you can protect your wealth from over taxation.

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