South Africa’s radical overhaul of expat tax went ahead as promised on Match 1 – but the good news is the government had a last-minute change of heart and upped the amount of tax-free foreign income expats can earn.
Instead of allowing ZAR1 million of foreign earnings as tax-exempt income, the limit was raised to ZAR1.25 million.
That leaves South African residents working overseas paying tax on their earnings above ZAR1.25 million at 45%.
And potentially, the amount of taxable income increases as the new rules lump-in benefits and allowances offered as perks by employers as salary, such as housing, education, security and flights home.
Financial emigration changes on the way
In his 2020 Budget Finance Minister Tito Mboweni remarked he was aware of a mass exodus of
South Africans hoping to escape expat tax and that he was raising the exempt earnings amount to encourage some to stay on as South African tax residents.
The new law impacts the salaries of South Africans working overseas for no more than 183 days in any 12-month period, and the absence must include 60 days abroad in a row.
Speculation is also rife that the South Africa government plans to phase out financial emigration from March 1, 2021.
The realisation is many top earners are deserting the country to avoid expat tax.
But the government has voiced encouragement that all South Africans working abroad should maintain their ties to the country.
Proving tax residency
At the same time, the government has hinted that data swapping with foreign tax authorities leaves little leeway for failing to declare foreign earnings from employment and investments.
Tax residence in South Africa is based on two tests.
The main test is the ordinary residence test. If expats retain links with South Africa, like keeping a home that they return to when a contract overseas ends, then they are probably tax resident and the new expat rules apply.
The other test takes account of time spent in and out of country – the 183 day rule. This test is triggered if the outcome of the ordinary resident test is unclear.