FOR ALL THE SOUTH AFRICANS WORKING OVERSEAS… THE AMENDED FOREIGN EMPLOYMENT INCOME EXEMPTION IS COMING!
By now, every South African working overseas should be aware of the amendment to section 10(1)(o)(ii) of the Income Tax Act, 58 of 1962, the so-called foreign employment income exemption. In terms of the amendment, which will come into effect from 1 March 2020, South African tax residents working abroad for more than 183 days during any period of 12 months and for a continuous period of more than 60 days during that 12 month period, will be required to pay tax in South Africa on their foreign employment income exceeding R1 million.
Over the last few months many articles have been written about the amended foreign employment income exemption and how tax under the amended foreign employment income exemption can be mitigated by emigrating for tax purposes from South Africa. The reason for this is simple, non-residents are not taxed on a worldwide basis and would therefore not be impacted by this change. Unfortunately, to become a non-resident, one has to emigrate for tax purposes, which may give rise to a tax liability to SARS. This is due to the application of section 9H of the Income Tax Act which imposes an exit charge where a South African ceases to be a resident for tax purposes.
The recently released draft Taxation Laws Amendment Bill, 2019, quashed any hopes that the implementation of the amendment would be postponed or that the R1 million threshold would be increased. This, combined with the looming threat of additional taxes to fund the new National Health Insurance Fund, will probably further increase interest in tax emigration.
So what is the cost of tax emigration, and what are the practical considerations in this regard?
In terms of section 9H, a deemed disposal is triggered of each and every asset (being worldwide assets but excluding certain assets) of the taxpayer at their market value on the day immediately before the date of emigration, and a deemed reacquisition of such assets at their market value on that same day. The effective consequence is that tax will be payable by the taxpayer on any gain realised on the difference between the market value and the base cost of the taxpayer’s worldwide assets. The reality of the application of the exit charge is that many South Africans working overseas cannot afford to emigrate for tax purposes as they cannot afford to settle this cash liability with SARS. However, it is important to note that the deemed disposal does not apply in respect of South African immovable property. Each taxpayer would thus have to consider his/her balance sheet to determine the potential capital gains tax cost of emigration.
Many South Africans who have been working overseas for a number of years may have already emigrated for tax purposes without formally documenting this with SARS. Previously, they had no reason to consider this as it had no real impact on their South African tax position. If these South Africans are able to show that they ceased to be South African tax resident during an earlier tax year, they may not be subject to the exit charge. Previously, paragraph 12(2)(a) of the Eighth Schedule to the Income Tax Act provided for an exit charge upon emigration. However, it was argued that this paragraph in certain circumstances did not actually trigger a tax liability. Section 9H was introduced with effect from 1 April 2012. After the Supreme Court of Appeal on 8 May 2012 ruled in favour of the taxpayer in the case of CSARS v Tradehold Limited, section 9H was amended with effect from the date of the judgment.
In those instances where a taxpayer wants to rely on emigration in a previous tax year, one would need to consider the specific facts applicable to the taxpayer and whether this can be substantiated with the requisite supporting documents. How would a taxpayer show that he/she ceased to be South African tax resident? Firstly, the expatriate must no longer be ordinarily resident in South Africa. This term is not defined in our law and therefore the interpretation given by the courts must be followed. The courts have indicated that a person’s ordinary residence is where he has his usual or principal residence, what may be described as his real home, the place he returns to from his wanderings. The courts have also indicated that whether a person is ordinarily resident in South Africa is determined based on that person’s particular facts. According to SARS, the factors that will be considered in this regard include the person’s intention to be ordinarily resident in a certain country, the person’s most fixed and settled place of residence, the person’s place of business and personal interest including that of his family and the location of the person’s personal belongings. This may be relatively easy for taxpayers who are single or living overseas with their families, but it is substantially more difficult for taxpayers working overseas while their families are still residing in South Africa.
Secondly, the expatriate must not meet the requirements of the physical presence test. This a very specific test. It basically comes down to not being physically present in South Africa for more than 183 days during a year of assessment and for a consecutive period of 5 years. Both of the aforementioned tests are, however, subject to tax treaty override. This means that if the expatriate is tax resident of another country with which South Africa has a double tax treaty, and the expatriate is, in terms of the tie-breaker test in such treaty deemed to be exclusively a resident in the other country, he/she will not be regarded as South African tax resident. South Africa will thus be obliged to treat him/her as a non-resident for tax purposes.
Considering the above, the expatriate’s facts will need to support the position that he has ceased to be South African tax resident. The expatriate must have taken certain steps which will include, for example, having no intention to return to South Africa, the selling of a South African home and the moving of family and personal belongings overseas. Also, the expatriate must have not returned to South Africa to spend a considerable amount of time in South Africa. This will be supported if the expatriate has, since his date of emigration, only declared income of a South African source to SARS in his South African income tax returns. Documentation as evidence of the above is needed. The expatriate must consult his local tax advisor on the appropriate documentation to keep on file in case his position is challenged by SARS.
It seems ironic that an amendment which is intended to increase tax revenue, is encouraging South Africans to emigrate. Taxpayers now uprooting their families from South Africa will result in a further loss of income for the country. These employees and their families will no longer be spending the foreign-earned cash in South Africa.
It should be noted that there is a difference between an emigration for tax purposes and an emigration for exchange control purposes. Even if the expatriate on the basis of his facts might have emigrated for tax purposes from South Africa, an emigration for exchange control purposes is something completely different and must separately be considered. If the expatriate has not yet emigrated for exchange control purposes but would want to, this must be attended to as soon as possible. It will also support the position that the expatriate has ceased to be South African tax resident.