Taxing times

Tax has always been confusing. If you throw around words like ‘double tax agreements’ (DTAs) and ‘financial emigration’, you simply up the complexity levels.

So how can you find out your tax status and whether South Africa has a DTA with another country? Angelique Ruzicka interviews Danielle Luwes, tax manager at Hobbs Sinclair Inc., to find out more.

AR: Why is it important to find out your tax status?

DL: South Africans working or living abroad need to check their tax residency status and ensure that they are adhering to the relevant criteria as the amendments to the Income Tax Act have been fully enacted. This has a significant impact on all South Africans working abroad who are still ‘ordinarily resident’ in South Africa for tax purposes, i.e. your primary home is in South Africa.

The determination of whether you are ordinarily resident in South Africa can be complex and differs for each individual’s specific circumstances. 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 a property in South Africa. This is because he does not live in South Africa on a permanent basis.

AR: What are the changes to the Income Tax Act?

DL: New tax law states that as of March 2020, South African residents who are employed outside of South Africa, and are out of the country for periods exceeding 183 days (60 days of which are consecutive) in any 12-month period, now qualify for a R1.25 million exemption from South African income tax on foreign income earned.

Any foreign employment income earned over and above R1.25 million is taxed in South Africa by applying the normal tax tables for that particular year of assessment. While this tax incentive may seem generous, it is worth noting that all earnings, including allowances and fringe benefits (such as interest-free debt, bursaries for children, and staff and travel allowances), must be declared. This can very quickly bring you up to that R1.2 million limit.

AR: Should we be concerned by DTAs?

DL: Concerns remain that the new tax laws will result in a taxpayer having to pay double tax on foreign employment income. However, the purpose of DTAs between countries is to eliminate double taxation on income.

South Africa holds DTAs with most other countries and this provides relief for taxpayers who receive income in both South Africa and a foreign country. A list of DTAs that South Africa has can be found here.

AR: Is it best to financially emigrate?

DL: While it may appear that financial emigration is a viable tax mitigation strategy, in most cases it is questionable whether this is a worthwhile option as it requires severing financial ties with South Africa and payment of capital gains tax on worldwide assets.

Financial emigration from South Africa is also not necessary in order to establish an offshore stream of income. For most South African-based business owners it is often wiser to use their South African assets as a platform to build an offshore revenue stream which, correctly structured, will not be taxable in South Africa.

AR: How long would it take to financially emigrate?

DL: You will need to partner with an authorised South African commercial bank to assist you with the process. The first step is to complete an MP336(b) form. This process normally takes about six to eight weeks to complete.

Thereafter, you need to apply for an emigration tax clearance certificate from the South African Revenue Service (SARS); this process can take up to 21 business days once SARS is satisfied with the information provided.

AR: How can you make sure you’re not paying unnecessary tax?

DL: It is vital to have an effective and well-thought-out tax strategy that ensures tax compliance for any given situation or individual, as there is no one-size-fits-all approach.

Acquiring the services of a tax specialist who has your best interests at heart, understands your specific circumstances, and can offer sound advice on what options are available to you will go a long way towards saving you your hard-earned cash, and ensuring that you are tax compliant so that you do not have to pay unnecessary taxes on your expat income.