‘Ex-Pat Tax’ is SARS’s new way of charging tax on income which is earned outside of South Africa. This article serves to bring you up to speed about it and also how it will affect you.
Effectively, South Africa is changing to a new way of calculating income tax for ex-pats.This means you could be eligible to pay tax on incomeyou earn abroad which does not get sent to South Africa. The impending started from 1 March 2020 and already its causing stress for thousands of South Africans living and working abroad.Ex-pats who live and work in zero-tax countrieslike Dubai or Abu Dhabi, will definitely feel the brunt of this new law change. They will have to pay tax in South Africa on income earned, invested or saved even if they never return to South Africa as they will be considerednon-resident taxpayers.
Those paying this tax are tested either as ‘physically present’ or ‘ordinarily resident’ in the country.The new rules drop the traditional ex-pat tax exemption which was originally designed to stop South Africans paying income tax on their earnings at home if they were abroad for 183 days in any 12month period, which must include a continuous absence of 60 days or more.
In the 2017 budget, then finance minister, Pravin Gordhan announced that the ex-pat exemption will cease from 1 March 2019. Income tax is payable on earnings of over ZAR1,2 million at rates of up to 45%.In March 2019Tito Mboweni, the new finance minister at the Treasuryagain confirmed the new ex-pat tax rules will start from March 2020 and that the government had no intention of dropping the legislation. It was felt that the ex-pat tax rules were encouraging too many high-earning South Africans to leave the country in order to avoid the tax, so he relaxed the threshold from ZAR 1 million to ZAR 1.25 million (Around £56 000) annually. Mboweni dropped another clanger with the suggestion that financial emigration will be scrapped from March 2021 in order to end the exodus of South Africans running abroad in order to escape ex-pat tax.
South Africa currently has Double Taxation Agreements (DTA’s) with more than 80 other countries globally. These DTA’s are agreements between South Africa and another countries over who has the right to tax your income and gains.The aim is to ensure that ex- pats are not taxed on the same income twice, however they may have to make a balancing payment if tax rates differ between each nation.
Under the new rules, SARS has stipulated emphatically that any earnings by ordinary residents will be taxed in South Africa along with any foreign earnings.
The SARS ‘Physical Presence’ test
The SARS ‘Physical Presence’ test determines if someone is tax resident in South Africa by checking the number of days they spend in the country.
The test is in three parts. Someone must fail to meet the date limits in each part to prove non-residency for tax.
The tests are:
- Did you spend 91 days or more in South Africa during the tax year in question?
- Did youe spend 91 days or more in South Africa in each of the five tax years prior to the tax year in question?
- Did you spend 915 days or more in South Africa during the five tax years before the tax year in question?
Anyone who meets one or more of the tests but who stays out of South Africa for 330 days or more is a non-resident from the last day they qualified as physically present.
Everyone else will be taxed on their worldwide income and gains in South Africa.
To beat the physical presence test, expats should log the times and dates when they enter and leave South Africa to accurately record if they were physically present in the country – also noting that the time limits apply to full days, not part days.
Resident or non-resident
As with any ex-pats from other countries, South Africans living abroad cannot decide that they are non-resident at home and now resident in another country.
Non-residence is a matter of fact and law and the physical presence and ordinarily resident tests can decide the issue for them. It means that expats can live in another country but still be ordinarily resident in South Africa if they have not taken care to break all ties with their homeland, leaving the expat open to receiving an unexpected tax bill.
The government has determined that just over 900000 South Africans currently live abroad, however only 103000 can prove they are non-resident in South Africa. That leaves nearly 800,000 South African expats facing tax bills when the new laws take effect from March 2020.Furthermore if they are non-resident, any return to South Africa within five years of leaving can class them as failed emigrants and leave them open to financial penalties.
SARS Guidance – “An individual will be considered to be ordinarily resident in South Africa, if South Africa is the country to which that individual will naturally and as a matter of course return after his or her wanderings”
Will you be affected by the new South African tax?
Any South African abroad earning ZAR1,25 million or more from any source will automatically fall into the SARS South African tax group.
Double Taxation treaties may protect expats paying tax at an equal or higher rate than in South Africa, but anyone else should prepare to expect a bill from SARS.Companies who send workers abroad on assignment will have to consider how the tax will affect them.Gross earnings will not only cover salaries, but also include benefits like accommodation, cars, school fees and trips home.The concern is employers at home and abroad will pick up the tab for expat workers by increasing salaries and benefit packages to cover the new tax, effectively pricing South Africans out of potential overseas jobs.
What are your options ?
South Africa, like more than 100 other nations in the worldare members of the Common Reporting Standard (CRS) which is a global data-swapping network. Each of the member nations’ financial authority compiles a list of accounts and investments owned and controlled by foreign nationals. They send these details to the ex-pats’ home country’s tax authority for comparison with their tax filings, in return, other authorities in the network also send financial data on their ex-pats.
At the time of announcing the new South African tax laws also launched a chance for taxpayers to ‘come clean’ over undisclosed wealth while waiting for the Common Reporting Standard (CRS) to kick in with an amnesty. The CRS network is now properly up and running, meaning that South African Revenue Service (SARS) is already collecting information about the financial affairs of ex-pats in order to cross-check against their submitted tax returns.
The result is if the expat fails to disclose income, SARS will have data from elsewhere, which will red flag any possible tax avoidance.
So what are your options? There areveryfew options available to taxpayers.
Leaving South Africa to become resident elsewhere can lead to other tax implications on assets such as property or investments still in the country.
South African expats who can prove they are tax resident in another country are exempt from the new tax,but will still pay tax on income or gains generated in South Africa.
A bigconcern for ex-pats is that most assignments abroad are paid in US Dollars, a strong currency which has driven down the Rand’s exchange value.
Financial Emigration, should I or shouldn’t I ?
Many ex-pats are uncertain about the option of Financial Emigration, however it can be the ideal solution to draw a line in the sand with your finances and your relationship with SARS. There are many myths about losing SA citizenship, your SA passport or dual nationality etc Financial Emigration does not, in any way, affect your SA passport or right to return or live in South Africa. It’s a formal way of ending your relationship with SARS, it will terminate your tax residency status with themand you will become a ‘non-resident’ South African living abroad, so no more tax returns.Terminating your tax residency status will require a rather strict and exacting verification procedure. This isfor the most part because financial emigration is not something that SARS agrees to lightly. The main reason being that once completed, they will no longer be able to tax any ‘global’ income earned by a non-resident.