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On 1 March 2020 the amended section of the Income Tax Act concerning foreign income exemptions comes into effect. This so-called “expat tax” has caused consternation among South Africans living abroad who currently pay no tax if they meet certain criteria. But, from next year, only R1 million of this income will be exempt from tax.

Such is the anxiety around this change that National Treasury will be holding a workshop to discuss concerns on 6 March 2019. However, Samantha Lance, Citadel Fiduciary Partner, believes the hype around the proposed change is clouding its fairness. 

“We do agree with the fact that expats need to be taxed in some way,” says Lance. “We don’t have a problem with the R1 million that they have put in place, meaning that everything over R1 million will be taxed.” This is quite reasonable, she says, “especially if you are earning money outside South Africa but you still own property, your family lives here and you want to be seen as a South African”. Admittedly, most affected taxpayers are probably earning hard currency and the current weakened rand will, to some extent, negate the impact of the R1 million exemption.

Lance adds that if an expat is already paying tax in another country “then the effect of the new tax may be mitigated by tax paid elsewhere in terms of a double tax agreement with a possible minimal effect. It may mostly hit people working in tax havens like Dubai, who pay no tax.”

WHO DOES TREASURY HAVE IN THEIR SIGHTS?

For individuals earning less than R1 million abroad this new amendment will have little bearing, but Lance believes Treasury is targeting individuals such as pilots or oil rig workers who have a family living in South Africa and who own a fixed property, but who work for an offshore company. “Until now these individuals were exempt from paying tax in South Africa,” she explains, despite enjoying the benefits of their families living in the country.

Yes, says Lance, it will be difficult for someone who hasn’t been paying tax to start, but the impact might not be as large as has been reported. “Remember these expats will get the first R1 million completely tax free, which is already a big benefit if you are living in a country with a low tax bracket. They will only start paying tax in South Africa on the first rand earned after that R1 million, so the tax sliding scales will only start for R1 000 001.”

“EXPAT TAX” CONCERNS

Of greater concern for Lance is the mis-information around financial emigration, which is being touted as a way of continuing to pay no tax. “This is not true,” she says. “Financial emigration does not exempt you from paying tax in South Africa.”

You still need to pay tax on any South African-sourced income, explains Lance, therefore, it is vitally important that you obtain the correct advice before making any decisions or applications regarding your assets and tax affairs.

“Our other big concern is that many people have moved out of South Africa many years ago, although they have not financially emigrated, but they are not tax residents in South Africa because they have been living abroad for such a long time. Surely the South African Revenue Service (SARS) can’t go and apply an expat tax on those people?” she asks.

THE ROLE OF CROSS-BORDER INFORMATION SHARING

It is also worth noting the impact of cross-border information sharing on the implementation of this expat tax.

Firstly, since expats have always been required to complete a tax return in South Africa, even if they were exempt from paying income tax, this information is already available to SARS. “On top of that, due to information sharing between countries and banks SARS will know exactly what people are getting paid into their bank accounts,” says Lance. It should be noted that where expats have not been submitting tax returns in South Africa, they are in default with SARS and financial emigration will not fix the tax compliance issue in retrospect.

Information sharing agreements were specifically noted by Finance Minister Tito Mboweni in his 2019 National Budget as a key focus area for fixing SARS and tightening the tax net. This means that expats too will increasingly be on SARS’s radar, underlining the importance of ensuring your affairs are in order and in line with these new proposed amendments.