Tax Relief Strategies for South African Expats to Protect Their Foreign-Earned Income

Let us introduce you to Peter X, who is currently leading a satisfying life abroad, thanks to his strong work ethic. As tax season draws near, it’s vital for him to explore the tax relief options applicable to his foreign-earned income, as these could have a significant impact on his financial situation.

Per the advice of expatriate tax specialists, considering Peter’s income level and his country of residence, he stands to either receive a refund close to R47,000 for the current tax year, or a considerable R184,984.04. The exact amount depends on the exemption he opts for when submitting his South African tax return.

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For more insights, check out: South African expats in the UK must act before the tax net closes

If Peter applies the exemptions designated for tax residents under section 10(1)(o)(ii) of the Income Tax Act, he can expect the first refund amount. This expat exemption permits him to eliminate nearly R185,000 in tax obligations in South Africa, as long as there is a Double Taxation Agreement (DTA) between South Africa and his foreign tax jurisdiction.

These figures are significant and underline the importance of researching the various tax relief options available to South African expatriates to protect their foreign income.

Ultimately, this relates to South Africa’s residence-based taxation framework, governed by the South African Revenue Service (Sars) per the Income Tax Act. A primary issue is identifying who qualifies as a tax resident. Tax residents in South Africa are expected to declare and pay taxes on their global income and assets to Sars.

This tax residency status is crucial for individuals leaving South Africa; maintaining tax residency means an ongoing obligation to the tax authorities regarding global income. Former expatriates seeking to avoid permanently losing their tax residency after completing the formal financial emigration process can consider either the expat exemption or DTA relief. Both alternatives offer the potential to lower tax liabilities, but understanding their unique ramifications is essential.

Many people conflate the expat exemption and DTA relief, but they fulfill distinct roles within tax law.

Expat Exemption: This is available to tax residents who meet specific criteria. Effective starting 1 March 2020, the exemption caps relief at R1.25 million per assessment year.

A DTA is a reciprocal agreement between two countries designed to mitigate the double taxation of income, establishing guidelines that distribute taxing rights between the two jurisdictions.

Expat Exemption: Section 10(1)(o)(ii)

If applied correctly, this exemption prevents Sars from taxing the resident on employment income up to the R1.25 million threshold. Any income surpassing this threshold will be subjected to marginal tax rates in South Africa. To qualify for this exemption, the following conditions must be met:

  • The taxpayer must be categorized as a tax resident of South Africa;
  • The income must stem from remuneration;
  • The remuneration should be in exchange for services rendered;
  • The services must be executed “outside of the republic”;
  • The taxpayer needs to present proof of an employment relationship (for instance, an employment contract); and
  • The taxpayer must spend over 183 days outside South Africa, including 60 consecutive days.

It is vital to understand that declaring worldwide income and assets remains obligatory for Sars. Any earnings classified beyond what is stipulated in the employment contract as “income” will be fully taxable in South Africa.

Even if a taxpayer’s earnings are below the stipulated threshold, they are still mandated to file a tax return with Sars. The responsibility lies with the taxpayer to furnish all pertinent information to Sars, as the agency will not automatically consider this income as non-taxable. The income needs to be declared, and the exemption must be rightly applied to be effective.

When to consider DTA relief

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Individuals who do not meet the above requirements or those with substantial income may benefit from renouncing tax residency via a DTA — assuming such an agreement exists between South Africa and their host country. Unlike the expat exemption, this relief is not subject to the R1.25 million limit. This cessation is a temporary measure compared to financial emigration, which permanently concludes tax residency.

It’s essential to grasp that merely having a DTA in place between South Africa and the hosting country does not guarantee relief. Considerations include:

  • Is the expat also a tax resident in the host nation?
  • Does the expat plan to return to South Africa permanently in the near future?
  • Do their personal circumstances meet the “tie-breaker” criteria outlined in the relevant DTA?

After clarifying these aspects in the host country, the taxpayer can alert Sars of their intention to terminate their South African tax residency under the DTA.

Comparison of the two approaches

Application of Section 10(1)(o)(ii) VS Application of DTA
Exemption limited to R1.25 million All foreign income is non-taxable
Tax residency is maintained Tax residency is relinquished
Subject to days spent and contract stipulations Bound by DTA eligibility requirements
Single Discretionary Allowance available for offshore transactions Requires approval for International Transfer TCS Pin on all offshore transactions
Only employment income is exempt All foreign income is classified as non-taxable
Banking as a resident taxpayer Banking as a non-resident taxpayer

Sars can still track you from abroad

Recent modifications in South African tax laws reflect a robust stance on monitoring expatriates. Sars has enhanced efforts by establishing a dedicated “Foreign Employment” unit to oversee South Africans employed outside the nation.

It is critical for expatriates to understand their tax duties in South Africa and maintain compliance with Sars, as specified in the Income Tax Act. Many expatriates mistakenly believe that leaving the country absolves them of tax responsibilities; however, Sars continues to maintain taxing authority over their income unless exemptions apply.

By staying informed and seeking professional guidance, expatriates can more effectively navigate their tax responsibilities, minimizing potential liabilities and ensuring they uphold a positive relationship with Sars while enjoying their international experience.

John-Paul Fraser is a tax attorney and Chavaughn Phillips is an expatriate tax specialist at Tax Consulting SA.

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