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 the expat landscape. With less than 6 months to go, expats, their employers - and maybe even SARS employees - are scrambling to fully understand the implications thereof.
No longer a question of if or when.
For those still in disbelief, the amendment to the expat exemption was promulgated on 18 December 2017. In March 2019, the National Treasury held a workshop where, in no uncertain terms, it was communicated that the law would come into effect as planned. This was confirmed when the Draft Taxation Laws Amendment Bill was released, which did not contain any further proposed amendments to the expat exemption.
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In the 2017 Taxation Laws Amendment Bill, it was announced by National Treasury that the expat exemption would be repealed in its entirety – meaning that the totality of an expat’s income earned abroad would be subject to tax in South Africa.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, who were in opposition to the amendment. Following presentations to the Parliamentary Standing Committee on Finance and many submissions and workshops later, expats were begrudgingly handed the R1 million per annum exemption and an extension to the effective date of the amendment, being March 2020.
Benefits and allowances
Many expats still do not have clarity on what exactly will be taxable once the amendment takes effect. However, it must be understood that expats’ 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 likely that the R1 million exemption may be exhausted somewhat rapidly. This will specifically be the case where their employer pays for “benefits” such as security costs or drivers, international school fees, medical insurance or housing, even though these may not provide any economic benefit to the expat.
Unforeseen dire impact on SA economy
The amendment will undoubtedly result in an additional tax liability where expats earn above a certain threshold. The question is, who will pick up the tab? The reality is that in many instances, company policy (such as tax protection or tax equalisation) would dictate that employees’ take-home pay will be guaranteed, irrespective of their expatriation. These policies are necessary to ensure that companies can continue to attract and retain high-value resources. In these instances, the additional tax cost will be borne by the employer.
This simply means that South African expats come at a higher cost, which, in the current economic climate, may lead to those employers setting their gaze on resources from jurisdictions with less punitive tax regimes. With this being the case, our talent pool will lose on invaluable international exposure.
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 specifically to deal with queries around the amendment, but there is no sign of this as 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 tax residency of South Africa. However, doing this is not as simple as one might think. There are different options when doing this, but by far the cleanest and most direct approach, provided this is done correctly, would be to financially emigrate. 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 get their ducks in a row before the amendment kicks in, employers will have no choice but to obtain a comprehensive understanding of their obligations.
For expats, employers, tax professionals and financial advisors and the layman wanting to be prepared for 1 March 2020, LexisNexis and Tax Consulting are releasing a textbook Expatriate Tax - South African Citizens Working Abroad and Foreigners in South Africa. The book covers all tax implications around international mobility, both from the perspective of the individual and the employer, including the amendment to the expat exemption.
The publication has been described by 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.”
Expatriate Tax, South African Citizens Working Abroad and Foreigners in South Africa will be available from mid-October 2019 in Print format (9780639005195) for R747.50 including VAT and excluding delivery, eBook format (9780639005201) for R747.50 including VAT. To purchase, click here or visit the LexisNexis online bookstore for more information.
Written by Jean du Toit and Jonty Leon, Technical Editors of Expatriate Tax - South African Citizens Working Abroad and Foreigners in South Africa published by LexisNexis South Africa.