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Understanding taxation of foreign employment income and exemptions

emigrating sars passport

Under the Income Tax Act, No 58 of 1962, referred to subsequently as the ‘Income Tax Act’, all South African residents are taxed on their income regardless of where in the world they may be earning that income, subject to certain exemptions. One such exemption is the exemption from income tax on Foreign Employment income (Section 10 1(o) ii of the Act). On 1 March 2020 new provisions were made to this exemption and  there has been some confusion regarding the exact ambit of these particular provisions of the Income Tax Act. In this article, we will highlight the most important aspects of the foreign employment tax exemption and try to shed clarity on these intricate tax laws.

Below are the most important points to bear in mind regarding the foreign tax exemption.

The basic criteria

  1. As this exemption applies only to foreign employment income, you need to fit the definition of ‘employed’. If, contractually, you are an independent contractor, you may fall foul of the criteria entitling you to the exemption. When dealing with your tax returns as someone seeking a foreign tax exemption, the wording of your employment contract is one of the first things that must be checked. 
  2. The Section 10 Act Income tax exemption has nothing to do with the residential status, nationality or citizenship of your employer. Your employer need not be South African and can be foreign.
  3. Even if you qualify for the foreign tax exemption, you may still be taxed on any employment income above R1 250 000. This is because the exemption amount effective from 1 March 2020 is capped at R1 250 000 per annum. The good news though is that you will still qualify for normal tax deductions such as for retirement annuities, medical aid and any usual rebates under our tax laws. This should always be kept in mind when doing your tax planning.

Clarifying important issues on the requirement to be out of the country
One of the important aspects of qualifying for the exemption which may seem self-evident but is worth clearing up, is that you must spend the required number of days out of the country.

Under the Income Tax Act, your ‘days out of the Republic of SA’ need to amount to 183 days or more over any 12-month period. We recommend that you therefore work abroad for 184 days, to be safe.

During this 12-month period, you must spend more than 60 consecutive full days overseas. Once again, we recommend making this 61 days to ensure compliance. As for ‘full days’, they exclude the day you arrive and depart in SA.
What about leave? Can you be on leave or holiday during the consecutive 60-day period required? Yes, it is allowed, but strictly only if it falls within a period of employment – and not between employment periods – and these leave or holiday days also fall within your allowable days of leave as stipulated in your employment contract.

What if you’re working overseas, but not on land?
If you’re boat-bound as part of a shipping crew, you may well yet qualify for the Section 10 1(o) i full exemption of income which is not necessarily limited to the R1,250,000 income threshold. The requirements here though are slightly nuanced, so make sure to speak to a skilled tax advisor.

Avoid SARS snags
You should also register for provisional tax and submit realistic estimates of taxes due, to avoid unnecessary penalties and interest from SARS. In our experience, many expats and taxpayers qualifying for the income tax exemption were not registered for provisional taxes from 1 March 2020. As a result, they may face penalties and interest due to under-estimating their tax due. 

If you fall into this category, contact one of our tax specialists to help you request a reduction of your SARS penalty. Our friendly team of chartered accountants and tax specialists at Fenns Incorporated would be happy to assist with the wavering of penalties as well as tax return submissions.