Foreign Employment Income Exemption [Section 10(1)(o)(ii)] and Financial Emigration

Many individuals believe that if they financially emigrate that they will not be subject to tax in South Africa on foreign employment income. An individual’s tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether or not an individual breaks his or her ordinary residence.

An individual is a resident for tax purposes in South Africa either by way of ordinarily residence or by way of physical presence. If the taxpayer meets these requirements then they are taxed on foreign employment income subject to the s10(1)(o)(ii) exemption.

  • An individual will be considered to be ordinarily resident in South Africa, if South Africa is the country to which that individual will naturally and as a matter of course return after his or her wanderings. It could be described as that individual’s usual or principal residence, or his or her real home.
  • Physical presence test, that individual must be physically present in South Africa for a period or periods exceeding –
    • 91 days in total during the year of assessment under consideration;
    • 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
    • 915 days in total during those five preceding years of assessment.
    • An individual who fails to meet any one of these three requirements will not satisfy the physical presence test.

In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident from the day on which that individual ceased to be physically present. A deemed disposal for capital gains tax purposes takes place at the time when an individual breaks his or her tax residence. The individual will be deemed to dispose of his or her worldwide assets, excluding immovable property situated in South Africa.

If a taxpayer is a resident for tax purposes in South Africa, and that taxpayer is out of the country for 183 days (60 of these to be continuous) in any 12 month period, the s10(1)(o)(ii) exemption will apply:

  • Currently all foreign employment income is exempt i.e. there is currently no limitation.
  • From March 2020, the exemption is limited to R1mil. Any foreign employment income over R1mil will be subject to tax in South Africa.
    • If there is a double tax treaty between the foreign country and South Africa, then foreign tax credits under s6quat will apply (subject to limitations). However, if you live in a tax haven no foreign tax credits are applicable, as tax was not charged on the foreign employment income by the foreign country. Therefore, the full amount above R1mil is subject to normal taxation in South Africa i.e. per the tax tables and primary rebates will be applicable.
    • The employee would need to register as a provisional taxpayer if the foreign employer has no representative employer in South Africa as these foreign employers can’t deduct PAYE. The obligation would rest on the taxpayer to pay over the tax themselves on submission of their provisional tax.

In summation, ordinary residency, not financial emigration, impacts tax residency and the taxpayer’s tax obligation within South Africa. For more information, contact ERH Accountants.