Following on from part 1 which explained what financial emigration involves, part 2 looks at the recent amendment to the income tax act and what that means to South Africans who decide not to financially emigrate and who need to be aware of the recent tax changes and what that means to their income earned abroad.
It is ironic that amendments to the South African Income Tax Act, intended to generate further tax revenue for the country, will probably have the opposite effect when it comes to expat tax, says Jonty Leon, a tax attorney at Tax Consulting SA.
In terms of the amended section of the Income Tax Act, South Africans working abroad will in future be taxed in South Africa on any foreign income exceeding R1m. Fringe benefits and allowances, which form part of the expat’s remuneration package, will also become taxable once the R1m exemption has been exhausted.
The changes are set to become effective on March 1, 2020.
National Treasury invited key stakeholders to a workshop last month to address continued concerns around these amendments. “It was exceptionally disappointing to see how little public feedback is actually taken into account.
“It was clear at the workshop that National Treasury and the SA Revenue Service (SARS) are not budging on their decision to amend the foreign income tax exemption,” Leon told Fin24 on Monday.
Leon believes the amendment may be counterproductive.
“They think this amended law will generate further tax income for SA, but it will do the opposite in the end, as many South Africans are now deciding to stop their tax residency in SA.
“SARS could end up getting zero tax from expat income.”
More difficult to work abroad
Another issue Leon raised is that the amendment relating to taxation of benefits and allowances earned outside SA would make it more difficult for South Africans to get placed abroad as it could become too expensive.
“This will have a major impact on the competitiveness of South African professionals and the remuneration policy of multi-national South African companies,” said Leon.
“If you remain a tax resident of SA, then you have to declare your worldwide income and it will be taxable beyond the R1m exemption.”
Financial emigration and other options
He said one option would be what is called “financial emigration”. This would formalise that a person working abroad is not a tax resident in the eyes of SARS and the SA Reserve Bank (SARB) anymore. There are certain requirements to meet and this process does not affect citizenship.
Another option, according to Leon, would be to establish whether SA has a dual taxation agreement with the country where expat work is being done. Here, too, there are certain requirements to meet.
There are also additional international localised structuring opportunities available for those who are not working in Double Tax Treaty countries.