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Taxing foreign income for expats is becoming an increasingly confusing area of tax compliance. If you add buzz words like “double taxation treaty” and “financial emigration” to the mix, you’ll be forgiven for wanting to bury your head in the sand. Despite the perceived confusion of the situation, compounded by the many recent changes in tax laws and misinformation about the expatriate community, it is actually pretty easy to do. But the question is, how do you know that your taxes are being calculated correctly and that you are getting the right advice?
Knowledge of your tax status
South Africans who work or live overseas need to review their tax residency status and ensure they meet the relevant criteria as the changes to the Income Tax Act are fully in effect. This has a significant impact on all South Africans working abroad who, for tax reasons, still have their “normal residence” in South Africa, ie their main residence is in South Africa.
Determining whether you are ordinarily resident in South Africa can be complex and depends on the specific circumstances of the individual. For example, an airline pilot who lives and works in Dubai is not subject to South African income tax even if he has a South African passport and owns property in South Africa. This is because he does not live in South Africa permanently.
Changes to the Income Tax Act
The new tax law states that South African residents who are “employed” outside South Africa but are out of the country for a period of more than 183 days, of which 60 days are consecutive in a 12 month period beginning March 2020, will qualify for an exemption of R1.25 million from South African income tax on earned overseas income. Foreign labor income that is earned in excess of Rl 1.25 million is taxed in South Africa using the normal tax tables for the respective assessment year. While this tax incentive may seem generous, it should be noted that all income, including allowances and fringe benefits, must be declared. This can bring you to this limit of Rl 1.2 million very quickly.
Danielle Luwes, Tax Director at Hobbs Sinclair, says that in her experience, most taxpayers who work in foreign countries pay some form of local tax, or PAYE. “In general, these foreign taxes paid, which are deductible from the South African income tax payable, together with the R1 1.25 million exemption, mean that the taxpayer in South Africa is not liable for any further taxes. The prerequisite for this is that the taxpayer spends the specified number of days outside South Africa for the respective tax period, ”she explains.
Double taxation treaty
Concerns remain that the new tax laws will result in a taxpayer paying double taxation on foreign labor income. However, the purpose of double taxation treaties between countries is to eliminate double taxation of income. South Africa has DBAs with most other countries. This relieves taxpayers who earn income both in South Africa and abroad. In other words, if you pay tax overseas, that tax can either be deducted from the South African tax payable or the income is excluded from South African income tax depending on the terms of the DTA.
Financial emigration
While it may appear that financial emigration is a viable strategy for tax reduction, in most cases it is questionable whether it is a worthwhile option as it involves severing financial ties with South Africa and paying capital gains tax on worldwide assets requires. Financial emigration from South Africa is also not required to build an offshore income stream. For most South African based business owners, it is often wiser to use their South African assets as a platform for building an offshore source of income that, if properly structured, will not be taxable in South Africa. “While the grass looks greener on the other hand, the challenge of starting a new business overseas is extremely difficult,” warns Luwes. “However, it may be wiser to diversify your income outside of South Africa without emigrating.”
Get the right advice
The bottom line is having an effective and thoughtful tax strategy that ensures tax compliance for a given situation or person as there is no one-size-fits-all approach. If you have the services of a tax professional who is centered around your interests, understands your particular circumstances, and can provide sound advice about the options available, you can save your hard earned money significantly and make sure you are tax compliant and you must do not pay unnecessary taxes on your expat income.
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