Foreign Income Tax for SA Residents

Overview

Many South Africans receive some sort of foreign income, whether it's from dividends, employment, rental income, interest or royalties. You may be wondering if that income you receive from a foreign country is taxable in South Africa and whether you should declare it in your South African tax return. The short answer is yes: foreign income is taxable in South Africa.

The South African tax system states that if you're a South African resident (for tax purposes), you will be taxed on all local and foreign income you receive, regardless of where it is paid and where the source of the income is. This is called the World Wide Basis of taxation. So, if you have a South African passport and regard South Africa as your regular place of residence, you will more than likely have to pay income tax in South Africa. Fortunately, there are a few foreign tax exemptions you may be eligible for.

To understand the tax implications of foreign income better, we'll break it down into the types of income:

• Foreign employment income
• Foreign dividends & interest income
• Foreign rental income
• Foreign trade income
• Foreign royalties

Foreign employment income tax exemption

If you think earning an income from a global source isn't taxable on home soil, we're afraid we have some bad news. Whether you're earning Dollars, Euros or Yen, as a South African, it's more than likely you'll have to pay tax on this income. This is due to the world-wide basis of tax we mentioned earlier.

There is, however, some good news! Section 10 of the Income Tax Act offers a list of conditions where income earned (or at least a portion of it) for services rendered outside of South African borders will be exempt from income tax. This exemption will be capped at R1.25 million per annum from 1 March 2020.

When is foreign income not taxable?

A portion of your foreign income may not be subject to South African tax if you:

• Have a formal employment contract (with a resident or non-resident employer)
• Are a South African tax resident
• Earn a certain type of remuneration
• Spend at least 183 days (roughly 26 weeks, or about 6 months) of a consecutive 12-month period outside of SA rendering services to your foreign employer, and
• At least 60 of these days are continuous or unbroken

Still not sure? Try our decision tree to see if your foreign income is exempt from tax.

The 183-day / 60 Continuous Day Test

The 183-day / 60 continuous day test is the most confusing condition to understand and calculate, so let's find out more.

Firstly, the 183 days includes all calendar days, not only work days. Weekends, public holidays, annual leave days, sick leave days and rest periods spent outside of SA (provided you're employed at the time) are all included when figuring out if you meet the 183-day condition.

Secondly, the consecutive 12-month period isn't necessarily a calendar, financial or tax year  it's any period of 12 successive months.

Let's pretend you have a contract that starts on 1 April 2021 and is valid for 18 months, ending 30 September 2022. To see whether you meet the 183 day / 60 continuous day condition, you'll need to:

1. Mark the first date of your contract and count forward 12 months, e.g. 1 April 2021 to 31 March 2022.
2. Now determine whether you spent at least 183 days outside of SA during this period.
3. Then see if at least 60 of these days were continuous, i.e. in a row, with no break.
4. If you don't meet the conditions using the above method, then repeat the steps but use the end date of your contract and work backwards 12 months, e.g. 30 September 2022  1 October 2021.

If, using either method, you meet the 183 day / 60 continuous day criteria, then you're likely to receive at least a portion of your remuneration as non-taxable.

How SARS Works Out the Non-Taxable Portion of Remuneration

The amount of your remuneration for the year that will be exempt from income tax comes down to how much of your income was earned while you were outside of SA's borders.

For the above formula, it's important to note that work days only refer to days where services are rendered, and therefore exclude weekends, public holidays or leave taken. Also, the period refers to the full period during a year of assessment during which a taxpayer is required to render services outside of SA.

Here's a worked example: Sandiswa is employed by a South African subsidiary of a multi-national organisation and was asked to travel to Geneva to help set-up a new office there. She left SA on 1 May 2021, started work on 2 May 2021 and was contracted to work in Switzerland up until 19 December 2021. The subsidiary company in Switzerland paid Sandiswa R650,000 in total for this time period. She returned to South Africa three times during her contract:

• 22 June 2021 to 6 July 2021
• 30 August 2021 to 7 September 2021
• 11 November 2021 to 20 November 2021 (including 3 days' annual leave from 1720 November)

Step 1: Test the 183-day / 60-day rule (calendar days in Switzerland)

Sandiswa spent a total of 198 calendar days outside of the country. From 8 September to 10 November 2021, she spent 64 consecutive days in Switzerland, therefore she satisfied the 183/60-day test  a portion of her R650,000 income will qualify for tax exemption.

Step 2: Apportionment  work days inside and outside SA

* The three days annual leave must be deducted from actual work days for the calculation.

The R558,917 is the portion of Sandiswa's remuneration that's considered non-taxable, as it's directly related to services rendered outside of SA. The remaining R91,083 will be subject to SA income tax.

The Matter of Rest Days

In some cases, employment contracts specify and enforce rest days in line with their Health and Safety Regulations. For example, if you're working as an airline pilot outside of SA, it might be an employment condition that you work for a specific number of days or weeks before being forced to take a certain number of days or weeks as rest days, for safety reasons. During this rest period you're still employed, but you're not physically rendering your services.

In cases like this, SARS believes that during a qualifying period (i.e. the 183/60-day test is met), all remuneration that can be attributed to services rendered offshore will qualify for exemption and no apportionment must be done.

If you're in a position where you're working for a foreign company outside of South Africa for extended periods of time, you should familiarise yourself with the tax guidelines and implications  especially those related to the qualifying criteria and apportionment calculation for tax exemption.

Supporting documents required for SARS

In all instances of foreign employment and related travel, it's worth keeping the following documents handy, as SARS will more than likely request them:

• Spreadsheet showing number of days in and out of SA
• Copy of your passport showing days in and out of SA
• Letter from your employer stating you're allowed to work overseas (and for what periods), plus what amount was earned during that period
• Foreign/expat assignment employment contract
• IRP5 (if applicable) showing foreign employment income earned (e.g. source code 3651, 3653, 3655, etc.)

1 March 2020  changes to the foreign employment income exemption

National Treasury announced changes to the Foreign Employment Income Exemption in 2017, targeting South Africans working out of the country on expat contracts who may not have formally emigrated. From 1 March 2020, South African residents who spend more than 183 days working outside the country will be subject to South African tax on foreign employment income over and above R1.25 million.

At TaxTim we're all about explaining these changes simply. We've identified three examples of taxpayers affected by this law:

1. South Africans on a short-term overseas transfer who plan to return home

Let's say you're working in SA for a multi-national company, who then sends you to their office in Bermuda for 612 months to gain offshore experience. Previously, you'd claim the s10(1)(o)(ii) exemption and your income would be exempt from SA tax  benefiting from the more favourable Bermuda tax regime. From 1 March 2020, a taxpayer who pays 0% tax in Bermuda will now be required to pay tax on foreign income exceeding R1.25 million in South Africa, based on the normal tax tables for individuals.

2. South Africans who've been working overseas for years and plan to return eventually

Picture someone who left South Africa shortly after their studies to work in London for several years. They may pay tax in the UK and not consider themselves a SA tax resident, so they don't file returns here. Before the amendment, their income would've been exempt under s10(1)(o)(ii). For example, a taxpayer who pays 20% tax in the UK will now have to declare all UK income in South Africa and pay tax on foreign earnings exceeding R1.25 million  at up to 45% for higher earners. They will be able to deduct the foreign tax they've paid to avoid double taxation, but they will no longer benefit from the lower UK tax rate.

3. South Africans who have "financially emigrated"

If you work overseas and have recorded your emigration with the South African Reserve Bank and SARS, this does not necessarily mean that your tax residence has changed. This is merely one factor that may be considered to determine whether or not you have broken tax residence. The deciding factor remains whether or not you break your ordinary residence status.

Double taxation relief

If you're a taxpayer who works for a South African company, tax may be withheld in both South Africa and the host country. Fortunately, South African employers will be able to reduce their monthly tax withholding by the amount of any foreign employee's tax withholding that applies to that income, or by means of a Fixed Percentage Tax Directive.

You have Section 6quat on your side for double tax relief. Section 6quat is the mechanism to claim relief from double tax where the amount received for services rendered outside of South Africa is subject to tax in both South Africa and the foreign country. You may claim this credit on assessment when you submit your income tax return, provided you meet the specified requirements.

Foreign dividends & interest income

South African residents that earn foreign dividends generally have to pay tax on those foreign dividends and declare them when submitting their South African tax return.

The tax paid on the foreign dividends depends on the amount and type of shares held in the foreign company.

In most cases, where the taxpayer holds less than 10% of the equity shares and voting rights in the foreign company, then the foreign dividend received will be taxed. The full amount of the dividend must be shown in the tax return, however SARS will allow a tax exemption which equates to 25/45 of the Rand value of the foreign dividend. If the taxpayer has paid foreign tax on the dividend, this must also be declared, and SARS will reduce the local tax by the foreign tax paid.

Where the taxpayer holds at least 10% of the equity shares and voting rights in the foreign company, then 100% of the foreign dividend will be exempt in the taxpayer's hands.

You need to declare foreign dividends (source code 4216) in the Investment Income section of your tax return, together with the foreign tax credit (source code 4112). The foreign dividend exemption will be automatically calculated.

Foreign interest income

If you earn foreign interest, you need to report the Rand equivalent amount to SARS. Unlike local interest, there is no exempt portion, however you would be able to deduct any foreign tax you pay.

You need to declare foreign interest (source code 4218) in the Investment Income section of your tax return, together with the foreign tax credit (source code 4113).

Foreign rental income

If you own property overseas and are receiving an income by renting your property out abroad, this classifies as "foreign rental income" which is taxable for all South African residents. Any expenses that you incur relating to earning the rental income (bond interest, rates and taxes, insurance and repairs for example), should be claimed as a deduction to reduce your tax liability.

Often the country where your property is located will have deducted or withheld taxes from your rental income. You would be able to deduct these taxes as a foreign tax credit, so that you never pay tax twice. You would do this by entering the foreign tax paid in the relevant field within the Other Foreign Income section of your TaxTim tax return.

Remember to always check the rules of the country where the property is held to ensure you are tax compliant there as well, as you may need to submit a tax return there too.

Foreign trade income

If you earn foreign business or freelance income while based in South Africa, you need to declare the Rand value of the profit in your tax return. The profit will be taxed just like a local business  you can deduct all of your trading related expenses from your business income. Unlike a local business, there is not a separate section to declare all the revenue and expense items separately. You can simply work out the foreign profit and declare it as one amount in the foreign income section of the ITR12.

Foreign royalties

As a South African, if you receive royalty income from the use or utilisation of trademarks, patents, mineral rights, artistic or literary works from outside of South Africa, you'll be liable to pay foreign royalty income tax when submitting your South African tax return.

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