Meet Peter X, who is currently embracing a satisfying life abroad, largely due to his strong work ethic. As tax season nears, it’s paramount for him to explore the tax relief options pertaining to his foreign-earned income, as these could have a significant impact on his financial situation.

Per expatriate tax specialists, based on Peter’s income and his residency country, he might qualify for a refund close to R47,000 for the current tax year, or a noteworthy R184,984.04. The amount he can claim hinges on the exemption he selects when submitting his South African tax return.

Find out more: South African expats in the UK must act before the tax net closes

If Peter adopts the exemptions designated for tax residents, particularly under section 10(1)(o)(ii) of the Income Tax Act, he can anticipate the lower refund amount. This expatriate exemption permits him to eliminate almost R185,000 regarding tax debts in South Africa, contingent upon the existence of a Double Taxation Agreement (DTA) between South Africa and his foreign tax jurisdiction.

Such figures are important as they underscore the necessity for South African expatriates to investigate various tax relief avenues to protect their foreign income.

Ultimately, this scenario connects to South Africa’s residence-based taxation system, governed by the South African Revenue Service (Sars) in accordance with the Income Tax Act. The critical consideration is identifying who qualifies as a tax resident. Tax residents are required to report and pay taxes on their global income and assets to Sars.

This tax residency status is crucial for individuals leaving South Africa; maintaining tax residency implies ongoing obligations to tax authorities for their worldwide income. Expats wishing to avoid permanently forfeiting their tax residency post-financial emigration must look into either the expat exemption or DTA relief. Both can help lessen tax obligations, but a clear understanding of their unique implications is vital.

Many assume that the expat exemption and DTA relief are identical, but they fulfill distinct roles within tax laws.

Expat Exemption: This is accessible to tax residents under specific circumstances. From 1 March 2020, the exemption restricts relief to R1.25 million per assessment year.

A DTA is an international agreement between two countries designed to avert the double taxation of income, establishing rules that dictate taxing rights between the two nations.

Expat Exemption: Section 10(1)(o)(ii)

Once properly applied, Sars is unable to tax the resident on employment income up to the R1.25 million threshold. Any income over that limit will be subject to marginal tax rates in South Africa. The following criteria must be met to utilize this exemption:

• The taxpayer must qualify as a tax resident of South Africa;
• The income must arise from remuneration;
• The remuneration must pertain to services rendered;
• The services must take place “outside the republic”;
• The taxpayer must provide documentation proving an employment relationship (e.g., an employment contract); and
• The taxpayer needs to spend more than 183 days outside South Africa, with at least 60 consecutive days.

It’s key to understand that all worldwide income and assets need to be declared to Sars. Any earnings exceeding what is indicated in the employment contract as “income” will be fully taxable in South Africa.

Even if a taxpayer’s earnings fall below the prescribed threshold, they are still obligated to file a tax return with Sars. The responsibility lies with the taxpayer to present all necessary information to Sars, as the agency will not automatically categorize this income as non-taxable. Accurate declaration and exemption application are essential for this relief to be valid.

When to consider DTA relief

Those who do not meet the above criteria or those earning considerable income may benefit from terminating tax residency through a DTA, assuming such an agreement exists between South Africa and their host country. Unlike the expat exemption, this relief lacks the R1.25 million limitation. This cessation is a temporary measure compared to financial emigration, which permanently ends tax residency.

It’s essential to note that the existence of a DTA between South Africa and the host country does not automatically ensure relief. Important considerations include:

• Is the expat also a tax resident in the host nation?
• Does the expat plan to return to South Africa permanently in the foreseeable future?
• Do their personal circumstances meet the “tie-breaker” criteria in the relevant DTA?

Once these factors are established in the host country, the taxpayer can inform Sars of their intent to cancel their South African tax residency under the DTA.

Comparison of the two approaches

Sars can still track you from abroad

Recent changes in South African tax laws indicate a stringent approach towards overseeing expatriates. Sars has taken measures by establishing a dedicated “Foreign Employment” unit to track South Africans working beyond the borders.

It’s crucial for expatriates to comprehend their tax responsibilities towards South Africa and to remain compliant with Sars as per the Income Tax Act. Many expatriates mistakenly believe that leaving the country ends their tax obligations; however, Sars maintains taxing rights on their income unless exemptions apply.

By staying informed and seeking professional guidance, expatriates can adeptly manage their tax duties, reduce potential liabilities, and maintain a positive relationship with Sars while relishing their international experience.

John-Paul Fraser is a tax attorney and Chavaughn Phillips is an expatriate tax specialist at Tax Consulting SA.

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