Meet Peter X. He is living the good life abroad, but only because he works hard for his money. With tax filing season upon him, he will do well to determine what tax relief is available to him on his foreign-earned income because it can make all the difference in rand and cent. 

Based on Peter’s income and the country he resides in, expatriate tax specialists calculate he can either expect a refund of close to R47 000 for the current tax year, or a whopping R184 984.04. The calculations depend on which of the two different exemptions available to him, he applies, when submitting his South African tax return. 

The first amount will be realised if he uses exemptions applicable to tax residents, by virtue of section 10(1)(o)(ii) of the Income Tax Act. This is also referred to as the expat exemption. According to the calculations he will benefit from eliminating his tax burden in South Africa (SA) of almost R185 000 if he applies tax relief applicable to an expatriate residing abroad, where a Double Taxation Agreement (DTA) is in place between SA and the foreign tax jurisdiction.

These calculations are nothing to be sneezed at. It shows how important it is to consider the different tax relief options available to South African expatriates to protect their foreign income.

It all boils down to the residence-based taxation system in SA, which the South African Revenue Service (Sars) is guided by under the Income Tax Act. The starting point being who is considered a tax resident or not. Individuals who are treated as tax resident in SA, are obligated to declare and pay taxes to Sars on their worldwide income and assets.

For those leaving South Africa, this status can significantly impact their tax obligations: if they retain tax residency, they are still liable to the tax man, on worldwide income. Expatriates who do not want to permanently cease tax residency following the formal process of financial emigration, can consider one of the abovementioned either the expat exemption or DTA relief. Both can be used to mitigate your tax obligation, but you must understand the important differences between the two for your situation.

It is a common misconception that the expat exemption and tax relief under a DTA are the same, but the two serve different purposes in tax law. 

The expat exemption is available to tax residents and applies under certain conditions. From 1 March 2020, protection offered under this exemption is limited to R1.25-million per year of assessment.

A DTA is an internationally binding agreement between two countries and is designed to avoid double taxation of income. The agreement specifies rules for allocating taxing rights to one country in favour of the other.

Expat Exemption: Section 10(1)(o)(ii)

By correctly applying this exemption as relief, Sars will have no right to tax the tax resident on the amount equal to or below R1.25-million (threshold) received in employment income. Any amount above this will be subject to marginal tax rates in SA. Before this exemption can be applied, the following requirements must be met: 

• the taxpayer must be considered a tax resident of SA;
• the income received, must be in the form of remuneration;
• the remuneration must be received for services rendered;
• the services rendered must be “outside the republic”;
• the taxpayer must be able to prove an employment relationship (i.e., employment contract); and
• the taxpayer must spend more than 183 days outside of SA, of which 60 days are consecutive.

This means that worldwide income and assets are still to be declared to Sars. Any income generated outside of what is disclosed in the employment contract as “income”, will be subject to full tax liability in SA.

Earning an income below the threshold does not remove the taxpayer’s obligation to file a tax return in SA. The burden of proving all information to Sars falls on the taxpayer themself. Sars will not automatically deem this income non-taxable, but rather requires that the taxpayer declare their income and correctly apply the exemption, for its effect to take place.

When to consider relief under a DTA

Those who do not meet the abovementioned requirements or who receive income of significant value can benefit from ceasing tax residency by way of a DTA - if such an agreement exists between SA and the host country. This relief is not limited to a R1.25-million threshold, like the expat exemption. This cessation is a short-term temporary situation, opposed to the financial emigration process which is a permanent cessation of tax residency.

Note that having a DTA in place between SA and the country you find yourself in, does not mean you automatically trigger relief under that DTA. The following requirements may be considered:

• Whether the expat is also regarded as a tax resident in the host country;
• Whether it is his/her intention to permanently return at some point in the foreseeable future; and
• Based on that intention, whether their personal facts and circumstances would be supportive of the so-called ‘tie-breaker test’ contained in the applicable DTA.
• Once these factors are proven to exist in your host country, you can inform Sars by making a request to cease your tax residency in SA under a DTA.

Summary of the differences

Sars can still find you when you are out of SA

Changes in SA’s tax laws send a clear message that expatriates are being aggressively targeted. Sars has made its intentions evident by establishing a dedicated ‘Foreign Employment’ unit, specifically tasked with monitoring South Africans working abroad. 

It is crucial for expatriates to fully understand their tax obligations in SA and to ensure compliance with Sars as outlined in the Income Tax Act. Even long after leaving the country, many expatriates overlook the fact that Sars retains full taxing rights on their income, though this is subject to applicable exemptions. 

By staying informed and seeking professional advice, expatriates can navigate their tax obligations effectively, minimizing potential complications/liabilities and ensuring they remain in good standing with Sars while managing their life abroad.

Written by John-Paul Fraser, Tax Attorney at Tax Consulting SA; and Chavaughn Phillips, Expatriate Tax Specialist at Tax Consulting SA