From 1 March 2020, only R1 million of foreign employment income per year will be tax exempt under certain circumstances
If you receive employment income for work done outside South Africa, it is important to understand how you are taxed on this income. Although South Africa has a residence-based tax system – which means you are taxed in South Africa on your worldwide income – foreign employment income that meets certain conditions is exempt from tax in South Africa, according to section 10(1)(o)(ii) of the Income Tax Act, 58 of 1962. From 1 March 2020, however, only the first R1 million of foreign employment income that meets the conditions explained below will be exempt from tax.
While this article will help you understand the basics, it is best to get professional advice
Our estate and tax planning experts remain abreast of the tax planning conditions that affect your long-term wealth. So, if you earn foreign employment income of any sort and have questions about how this may be taxed, we recommend that you speak to your wealth manager about getting access to this expertise so that you can make informed decisions about your wealth.
Understanding when the foreign employment income tax exemption applies
|Terms of exemption||Unpacking what this means|
|Section 10(1)(o)(ii) applies when an employee …||An employee in this context is someone who is hired by an employer, with the employer having a right to control the employee’s work. This excludes an independent contractor or self-employed person. If you are a director of a company acting in your capacity as a director, this qualifies as being a ‘holder of office’, not an employee. Any director’s fees earned therefore do not qualify for exemption.|
|… renders services …||The services must be rendered under an employment contract.|
|for or on behalf of the employer …||Services rendered to both resident or non-resident employers could qualify for exemption. For example, if you earn employment income from a South African employer while performing the work outside of South Africa, an exemption could still apply.|
|… outside South Africa ...|
|for 183 days during a 12‑month period, of which 60 days were continuous.||To claim this exemption you will need to prove your absences from South Africa and that the purpose of these was to render services under an employment contract. This will require providing SARS with the relevant documentation, which may include a letter of secondment or employment contract and a copy of your passport.|
Any foreign employment income above R1 million may be taxed in South Africa
This will work as follows:
If an employer deducts tax where an exemption applies, you need to claim a refund
The possibility of an exemption under section 10(1)(o)(ii) does not automatically waive the obligation of an employer to deduct employees’ tax. If, however, your employer has deducted or withheld employees’ tax where the remuneration qualifies for exemption under section 10(1)(o)(ii), the employer may not refund over-deducted employees’ tax to you. You, as the employee, must claim a refund as part of your tax assessment.
What if you earn foreign income that does not qualify for a tax exemption?
In this case the remuneration may be subject to tax in South Africa and in the foreign country, unless relief is provided in the form of a double taxation agreement (DTA). The main purpose of a DTA is to eliminate the scenario where taxpayers must pay double tax on the same income. This is achieved by allocating certain taxing rights to the source state (where the income is earned) and others to the residence state (where the taxpayer is a resident for tax purposes).
The sections in the DTA dealing with the taxation of income from employment generally give the source state limited right to tax employment income received by resident individuals rendering employment services in the source state. On the other hand, the residence state has exclusive right to tax employment income received by the resident individual for services rendered in a source state if the employee is not present in the source state for more than 183 days in 12 months and the remuneration is paid by an employer who is not a tax resident in the source country. Where DTA relief does not apply, the employment income will be taxed in both countries. However, the foreign tax paid may be deducted from the South African tax payable on assessment in terms of section 6.
How you are taxed on your foreign employment income
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