By Jean du Toit and Jonty Leon, technical editors of the publication ‘Expatriate Tax – South African Citizens Working Abroad and Foreigners in South Africa’.
As many South African expats are now aware, as of 1 March 2020, the amendment to section 10(1)(o)(ii) of the Income Tax Act No.58 of 1962 (“the expat exemption”) will bring considerable change to the expat landscape.
With less than six months to go, expats are scrambling to understand the implications of the amendment, some still with their heads in the sand, hoping this will not come to be, or worse, that they can hide from it.
For those still in disbelief, the amendment to the expat exemption was promulgated in section 16(1)(g) of the Taxation Laws Amendment Act No. 17 of 2017, on 18 December 2017 under gazette number GG 41342. It is law.
Background – expats versus SARS
In the 2017 Taxation Laws Amendment Bill, it was announced by National Treasury that the expat exemption would be repealed in its entirety, meaning that the totality of an expat’s income earned abroad would be subject to tax in South Africa.
This perturbed the expat community, their employers and other stakeholders. Following presentations to the Parliamentary Standing Committee on Finance and many submissions and workshops later, expats were begrudgingly handed a R1 million per annum exemption, and an extension to the effective date of the amendment, being March 2020.
In March 2019, National Treasury held a workshop to further discuss the expat exemption, and in no uncertain terms, confirmed that the law would forge ahead in its current form.
This was confirmed when the Draft Taxation Laws Amendment Bill was released, which did not contain any further proposed amendments to the expat exemption.
Benefits and allowances
Most still misunderstand just how the expat exemption will work, and what will be taxable. It must be understood that an expat’s entire remuneration will be taken into account.
What this means is that if they remain tax resident, they will be taxed fully on any allowances and benefits, as if they were just a normal employee working in South Africa.
The consequence for the expat is that in some cases, the R1 million exemption will be exhausted somewhat rapidly. This will especially be the case where the employer pays for “benefits” such as security costs, drivers, international school fees, medical insurance or housing ‒ even though these may not provide any economic benefit to the expat.
Unforeseen impact on SA economy
A very real impact is that an expat, to perform their same duties, will not do so with less take home pay as a result of the amendment.
This will in some cases mean that any added tax burden on the expat will be expected to be borne by the employer if they want to attract and retain scarce resources.
This may also simply be the case as a result of standing policies such as tax protection or tax equalisation.
More worrying is that these employers can often not afford to increase a package in this manner, which will lead to those employers setting their gaze on resources from jurisdictions with less punitive tax regimes. We can potentially expect to see South African expats become less and less desirable in the global market, if this is the case.
For those of us back home, we may need to consider what the expats would do if their employer would not step in to alleviate the extra burden. These expats may simply decide to sever their ties with South Africa and cease their tax residency. In the long term, these individuals represent an important segment of our tax base and with their departure, the struggling fiscus would have to look at those who remain to make up the shortfall.
Uncertainty for employers
In addition to possibly having no choice but to pay their employees more, employers of expats are unsure how the amendment should be administered from a payroll perspective.
Employers have to ensure they withhold PAYE correctly, which is likely to be tricky if they do not want to prejudice the employee by being too conservative.
When presented with a surge of questions around payroll administration during the last workshop, SARS indicated that a dedicated function would be established to deal with queries around the amendment specifically, but there is no sign of this yet.
Unfortunately, the solutions for the expat in relation to this amendment are now becoming very limited. The expat exemption only relates to South Africans who are tax resident, so the obvious answer would be to cease being a tax resident of South Africa.
However, doing this isn’t as simple as one might think. There are different options when doing this, but by far the cleanest and most direct approach would be to financially emigrate, provided this is done correctly.
Ceasing tax residency, however, comes with certain tax implications, which must be understood fully before one embarks on this path.
The road may be equally perilous for employers who will seemingly have to navigate these unchartered waters without much guidance from SARS. To ensure they meet their obligations, they must get their ducks in a row well in time before the amendment kicks in.
For expats, employers, tax professionals, financial advisors and interested laypeople looking to be prepared for 1 March 2020, LexisNexis and Tax Consulting have released a textbook entitled Expatriate Tax – South African Citizens Working Abroad and Foreigners in South Africa.
The publication has been described by esteemed tax expert Judge DM Davis as “a most welcome addition to our body of tax literature and will doubtless be essential reading for anyone advising his or her client with regard to the tax consequences of migration.”