Taxation of income from foreign employment

2011-10-20 00:00

SOUTH African residents are subject to income tax on their worldwide income as South Africa has a residence basis of taxation.

Accordingly, remuneration earned by a South African resident (a natural person) from services rendered outside South Africa would be included in gross income.

The provisions contained in section 10(1)(o) of the Income Tax Act provide an exemption from South African income tax on any remuneration received by or accrued to in respect of services rendered outside the Republic.

Remuneration received by or accrued to an employee during a year of assessment for services rendered for or on behalf of an employer outside South Africa will be exempt from income tax if following requirements are met:

• The employee concerned must have been outside South Africa for a period or periods exceeding 183 full days in aggregate during any 12-month period

• For a continuous period exceeding 60 full days during that 12-month period

• The services must have been rendered during the period or periods of absence from South Africa.

The 183-day period must fall within a period of 12 consecutive months.

The 12-month period is not necessarily a year of assessment, a financial year or a calendar year.

The 12-month period must start or end in the year of assessment in which the services were rendered.

When identifying the possible 12-month periods which may be used, it is important first to identify the period during which the services were rendered to the employer. Then there are two options:

•A first 12-month period can be determined by working forward 2 months from the first day of the calendar month in which the first day of the employment period falls; or

•If the first 12-month period fails to meet the requirements for the exemption, another 12-month period may be used by working backwards 12 months from the last day of the calendar month in which the last day of the employment period falls.

Taxpayers may be required to submit supporting documentation to the South Africa Revenue Service where the exemption is used.

The supporting documentation may include secondment letters, employment contracts and copies of passports to verify the periods worked outside South Africa.

Employers should bear in mind that the potential exemption under section 10(1)(o) does not automatically waive the employer’s liability to withhold employees’ tax from the remuneration of the employee.

An employer may elect not to withhold employees’ tax where the employer is satisfied that the requirements of the section 10(1)(o) exemption are met.

The risk for the employer where the exemption is not applicable is that the employer would be held liable for employees’ tax on the remuneration as well as potential additional tax, penalties and interest.

It is therefore important for employers to ensure that the criteria for exemption will be met before making a decision not to withhold employees’ tax.

For more information call KPMG at 033 347 7600.

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