Gone are the days of tax-free salaries abroad for South Africans

Are you a South African tax resident? The budget speech delivered earlier this year forewarned that relief for South African tax residents working abroad and effectively achieving double “non-taxation” on salaries earned in other countries would be withdrawn. This threat has now materialised through National Treasury publishing its intention to withdraw the exemption in section 10(1)(o)(ii) of the Income Tax Act, 58 of 1962.

In terms of the exemption as it currently reads (prior to its repeal), salaries earned by South African tax resident individuals in other countries are exempt from South African income tax on condition that those salaries are earned for services rendered outside of South Africa, and that the South African tax resident employee is also outside of South Africa for at least 183 days of the year, of which 60 days are consecutive.

For years, South African taxpayers earning remuneration in other countries have been able to benefit from “double non-taxation”. The UAE is an example of a jurisdiction that in many cases does not levy personal income tax on non-UAE individuals, and South African individuals working there had thus far not been required therefore to pay taxes on salaries there, nor in South Africa.

As stated in the Explanatory Memorandum to the draft Taxation Laws Amendment Bill:

“It has come to Government’s attention that the current exemption creates opportunities for double non-taxation in cases where the foreign host country does not impose income tax on the employment income or taxes on employment income are imposed at a significantly reduced rate.”

It is therefore proposed by National Treasury that the exemption that has existed until now in section 10(1)(o)(ii) be deleted effectively from individuals’ 2020 year of assessment, in other words effectively from 1 March 2019 when the 2020 tax year commences. South African tax resident individuals will therefore effectively be taxable in South African from then on going forward on salaries earned abroad and to the extent that the country in which the salary is earned does not tax that salary.

What then about other countries that do levy personal income taxes, such as the UK? The repeal of section 10(1)(o)(ii) should not lead to double taxation: relief against double taxation (to the extent that it may arise) will be available in South Africa either in terms of the Income Tax Act (which provides for a credit to be granted for taxes paid abroad, if taxes are also paid in South Africa) or in terms of the double tax agreements that South Africa have with various countries across the world (if such agreements exist with the country in which the salary is earned).

For more information please contact Albertus Marais from AJM.