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JOHANNESBURG — National Treasury’s plan to do away with the 183-day tax exemption rule for South African residents and citizens who work overseas has stirred a hornet’s nest. Many Saffer expats in the likes of the tax-free UAE will be worried that they may have to pay SARS its fair share. The history behind this tax rule, though, is an interesting one. Whether the plan to tax expats is fair or not is a topic of hot debate. But Professor Matthew Lester, in this piece, provides an answer to those expats who want to escape paying tax in SA — simply emigrate. Realistically, this will be a tough option for many an expat. The article was first published on Matthew’s new blog. – Gareth van Zyl
By Matthew Lester*
There has been much gnashing of teeth surrounding the proposed income tax amendment to scrap the offshore earnings tax exemption contained in section 10(1)(o) of the income tax act.
Perhaps some explanation is needed.
The history goes all the way back to 2001 when SA, at very short notice, adopted residence based taxation. Prior to that SA taxed on an antiquated ‘source basis.’ The net result was that overnight SA taxpayers landed up taxable on their worldwide income, similar to most tax jurisdictions.
At that time section 10(1)(o) was promulgated,as an interim measure, to give time to properly consider the SA tax residents working abroad. The section was up for review within 3 -5 years. And then nothing happened for 15 years.
So today SA has rafts full of SA tax residents working abroad. So long as they spend more than 183 days a year outside SA, including an unbroken period of 60 days, there offshore employment income is tax free. There is not much data on the subject. Even at SARS.
Now this creates an ideal tax and family planning opportunity for some. One parent can disappear offshore for 6 months a year and earn tax-free foreign currency. The other parent can look after the kids and home in SA. Then everyone can meet up once a year for an overseas holiday to fulfil the 60-day unbroken absence requirement.
The new proposal goes that SA resident taxpayers will be taxable on their worldwide employment income, but a foreign tax credit will be granted on foreign taxes paid. Those who work in high tax jurisdictions should not get hurt. But those who manage to receive offshore income from a low or zero tax jurisdiction are going to have to top up in SA.
The primary whinge about the amendment seems to be ‘the inconvenience of working aboard justifies a tax exemption’. That’s rubbish. All work is an inconvenience. For example, what about South Africa’s mineworkers. Now that’s inconvenience! But they don’t enjoy tax exemption.
Granting a tax exemption does little more than disturb the labour market. For example, why should a nurse working for six months a year abroad enjoy the tax advantage over a nurse who works in South Africa for the full-year.
What can be done about it?
This debate only affects the SA resident taxpayer. That’s any person who treats SA as the place to which ‘they return to from their wanderings’ or, if that test is inconclusive, where the taxpayer exceeds the ‘days present tests’ contained in the income tax act.
So, in short, if you don’t want to pay tax in SA then don’t live here. Emigrate and make South Africa a holiday destination. That should do the trick if you can find another country that will allow you to be tax resident and enjoy an offshore earnings exemption. But that’s going to be difficult, unless you want to go and live on an island.
- Matthew Lester is an associate professor at the Rhodes Business School and a member of the Davis Tax Committee
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