If you’re a South African looking at job opportunities overseas, it’s advisable for you to ensure you’re prepared for the tax implications. This is because there is no longer such a thing as the blanket foreign income exemption under which all worldwide earnings could be excluded from your South African tax liability. Today, you will be expected to pay tax in South Africa on your foreign income where you are a South African tax resident.
Here’s what you need to know about the foreign income tax exemption in South Africa and how to use it.
Is foreign income taxed in South Africa?
The South African tax system states that if you’re a South African resident (for tax purposes), you will be taxed on all local and foreign income you receive, regardless of where it is paid and where the source of the income is. This is called the World Wide Basis of taxation. So, if you have a South African passport and regard South Africa as your regular place of residence, you will more than likely have to pay income tax in South Africa. Fortunately, there are a few foreign tax exemptions you may be eligible for.
What is the foreign income exemption in South Africa?
Section 10(1)(o)(ii) of the Income Tax Act contains an exemption for foreign employment income earned through employment services rendered outside the Republic. It can only be used if the requirements are met by the individual taxpayer, and the exemption only applies to the first R1.25 million earned. All income above this threshold will be subject to normal income tax in South Africa, regardless of whether it is taxed in another country.
Relief from double tax is available through the Income Tax Act by way of section 6quat credit (subject to limitations) or through any applicable Double Tax Agreements.
How much foreign income is tax free in South Africa?
The threshold limit for the foreign income exemption is currently capped at R1.25 million per tax assessment period. However, this exemption does not apply automatically, and individuals seeking to use this tax relief must ensure that they meet all of the requirements.
What are the requirements to qualify for the foreign income tax exemption in South Africa?
In order to qualify to use this exemption, as a taxpayer you must:
- Be a tax resident of South Africa
- Earn certain types of remuneration
- For services rendered through foreign employment:
- That are outside of South Africa
- For a specific amount of time (the 180 days rule)
- And not subject to any exclusions
Who can use the foreign income tax exemption?
As mentioned, the foreign income tax exemption only applies to a tax resident of South Africa who is an employee carrying out employment services beyond South African borders. This person must also be subject to tax on their worldwide income (in other words, a tax resident of South Africa). Accordingly, this exemption does not apply to an individual who is a non-resident for tax purposes.
What type of income is covered under the foreign income tax exemption?
The following income is covered under the exemption –
- Salary and taxable benefits
- Leave pay and overtime pay
- Wages, bonuses, gratuities
- Commissions, emoluments and fees
- Allowances (such as travel allowances, advances and reimbursements)
- Amounts paid out from broad-based employee share plans
- Amounts received in respect of a share vesting
How do you use the foreign income exemption in your tax return?
If you qualify for the exemption, you still have to submit a tax return in South Africa. Public Notice issued under section 25 of the Tax Administration Act, 2011 read with section 66 of the Act specifically states that a person working outside South Africa must still submit an income tax return.
To use the foreign income exemption in your South African tax return, you will need –
In all instances of foreign employment and related travel you will need to be able to furnish the South African Revenue Service (SARS) with the following, on request:
- Spreadsheet showing number of days in and out of South Africa
- Copy of your passport showing stamps that verify your days in and out of South Africa
- Letter from your employer stating you are working outside of South Africa (and for how long), plus the amount earned during that period
- Foreign employment contract or expat assignment contract
- IRP5 (where relevant) detailing foreign employment income earned (with the relevant source code such as 3651, 3653, 3655, etc.)
Where you are using an IRP5 that reflects your foreign income, it must have the relevant foreign source codes in order for SARS to properly allocate and approve the foreign income exemption. If your IRP5 has been issued by your employer using local codes, you will need to ask them to rectify and reissue it in line with SARS requirements.
Things to note about using the foreign income exemption:
- The exemption does not apply automatically. Your entire income amount must be declared in your South African tax return and you must request that the foreign income exemption be applied to the first R1.25 million.
- You must be able to show that you meet the time-based requirements in order to qualify for the exemption.
- You must be able to provide proof that you have already paid tax on this income.
Important reading: What happens when I do not declare foreign income if I have yet to cease SA tax residency?
FinGlobal: cross-border financial specialists for South Africans
Handling your finances and tax compliance in two countries can get complicated. FinGlobal is here to simplify things for you. We can handle your South African expat tax, assist with tax clearance and get you ready to move your finances abroad and make your exit from the South African tax system.
If you’re ready to say goodbye to SARS to stop having to rely on the foreign income exemption, we’re ready to help you make it happen. Leave us your contact details to learn more about our services.
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