Many South Africans working abroad are concerned about the impact of changes to the taxation of remuneration from foreign employment which come into effect on 1 March 2020. Jenny Gordon, Head: Retail Legal at Alexander Forbes, discusses the changes to the Income Tax Act and encourages affected South Africans to take proper advice.
The general rule is that SA tax residents are taxable on their worldwide income. However, section 10(1)(o)(ii) provides a specific exemption for remuneration earned for services rendered outside SA if an employee spends more than 183 full days (including a continuous period of more than 60 full days) outside SA in any 12-month period during which those services are rendered outside SA. Most foreign countries will tax the employment income of individuals who are earning income from employment in their country on a PAYE type system. The purpose of this exemption was to provide relief to SA tax residents from paying tax, both in the country where the services were performed as well as in SA. The 183 day and the 60 continuous days’ test, exempted SA residents from being liable for tax on the same income in SA, their country of residence.
However, many individuals are employed in countries where the employment income of foreign nationals is not subject to tax. These individuals would therefore pay no tax on that employment income, either in SA or in the foreign country where the services are rendered. This is obviously unfair and results in a situation of double non taxation. This goes against the intention of the exemption which was to provide relief against double taxation of the same income and not to provide double non taxation of the remuneration from foreign services.
In order to end the situation of double non taxation of foreign employment income, the section was amended in the Taxation Laws Amendment Act of 2017 with effect from 1 March 2020. Initially it was intended to repeal the section in totality. However, after impassioned representations by affected individuals to National Treasury, the proposal was revised and the section continues to allow the first R1million of foreign remuneration to remain exempt from tax in SA if the individual meets the requirements of section 10(1)(o)(ii) in relation to that remuneration.
The effect is that if an individual earn remuneration exceeding R1-million from foreign services, the portion exceeding R1-million will be included in the person’s SA taxable income and taxed at the person’s applicable personal income tax rate. It is important to note that this exemption is applicable to persons who are still considered tax residents of SA although they are performing services outside SA.
The practical implication of this for SA resident individuals is as follows: