BUSINESS NEWS - It is estimated that currently, close to 915 000 South Africans live (and work) abroad. Sharon Hamman, Senior Legal Adviser at Momentum Distribution Services, says many of these South Africans assume they are exempt from paying tax locally, but the reality is more complex.

As a South African taxpayer, your worldwide income is subject to tax in South Africa, which can be a total opposite reality compared to the taxpayer’s expectation.  

Many make a judgement error, believing that working and living abroad in a tax-neutral or tax-friendly jurisdiction takes them beyond the South African Revenue Service’s (SARS) reach – a mistake that can cost them dearly.

Up until 2020, South African tax residents working abroad were not liable for income tax on their foreign employment income in South Africa if they met certain requirements linked to the number of days spend abroad.  However, this changed in 2020.  Hamman says the changes introduced a cap to the tax relief a South African tax resident can enjoy.

She emphasises that South Africans living abroad must be proactive to ensure they optimise offshore income yet remain fully compliant with SARS.

Living abroad doesn’t mean losing control of your South African tax affairs

Hamman says success favours the focused, and for South Africans living abroad to stay focused on their tax affairs. Engaging with a financial adviser is key, not only to successfully navigate tax complexities but also to help with drafting a clear financial plan within the international landscape.

A financial adviser knowledgeable in international tax affairs can steer you in the right direction to determine your residency status and the tax implications thereof. 

Hamman says your financial adviser should ideally work alongside specialised tax practitioners to assist you with structuring a tax-efficient exit if required, minimise unnecessary tax liabilities, maximise any tax relief available through exemptions and double taxation agreements, and ensure full compliance with all SARS requirements.  

It is a team effort where knowledge is power, and action is rewarded with peace of mind.

Determining tax residency: The first step

Hamman says as a first step, understanding one’s tax residency status, is crucial. Not only does it dictate whether you are taxed on your worldwide income (as a tax resident) or only on South African-sourced income (as a non-resident) in South Africa, but it can also impact whether you are liable for estate duty on worldwide assets in the event of death, she says.

She highlights that to determine tax residency status; SARS uses two tests:

• The ordinarily resident test is a subjective assessment of where you consider your true home to be. Factors include your primary home, intention to return (including to retire), location of family, main bank accounts, and time spent in South Africa.
• The physical presence test is a day-counting test. If you are not ordinarily resident, you may still be deemed a resident if you spend a specific amount of time in South Africa over a six-year period.

If you decide to cease being a tax resident in South Africa, you must formally apply to SARS, says Hamman. 

You can only exit on the same basis that you became a tax resident.  Therefore, if you are a tax resident due to fulfilling the ordinarily resident test, you can only cease to be a tax resident if you are no longer ordinarily resident.  

The taxpayer will have the burden of proof to show that they are no longer ordinarily resident.  Where a person ceases to be a tax resident, Hamman says it can potentially trigger capital gains tax (CGT) on all affected assets, often called an “exit tax”.  

She clarifies that SARS views the cessation of tax residency as a deemed disposal all worldwide assets (excluding local immovable property), at market value, the day before cessation of tax residency, and any taxable capital gain will be subject to CGT.  

This tax liability may necessitate the sale of assets to realise liquidity to pay the tax, which highlights the importance of proactive planning.

Tax relief for South African residents working abroad

Foreign employment income exemption
South African tax residents working abroad may enjoy a foreign employment income tax exemption. Tax residents who spend at least 183 days outside South Africa within any 12-month period, of which 60 consecutive days, will enjoy a R1.25 million tax exemption on foreign employment income. 

They will only be liable for tax in South Africa on the amount in excess of this exemption. It is important to remember, says Hamman, that such exemption only applies to employment income and not to self-employed individuals. 

In addition, one should always consider the exchange rate, as fluctuations can push one’s income above the R1.25 million threshold.

Double taxation agreements
Hamman goes on to explain that double taxation agreements between countries manage the risk of anyone being taxed twice on the same amount.  Where a tax resident of one country lives and works in another country, the agreement dictates the rules to determine which one of the countries retains the right to tax that specific amount.

The agreement deals with various types of income, including employment income, rental income, dividends and interest, as well as capital gains tax, to name a few. 

She points out that South Africa holds double taxation agreements with numerous countries and where no agreement exists, South African tax residents may claim a foreign tax rebate to prevent double taxation, subject to certain limitations and requirements being met.

The need for professional financial advice

When making any financial decisions in a local or international context, it is vital to consult with an experienced, licenced financial adviser, legal adviser, and tax practitioner. Momentum’s Science of Success reminds us that success favours the focused, those who make deliberate and well-informed decisions rather than reactive ones. 

By working with trusted experts, you can focus on the bigger picture, ensuring your tax affairs are efficiently managed, your global investments align with your long term retirement goals, and your estate and succession plans work seamlessly across borders to secure your financial future.

Sharon Hamman

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