Expat tax: not all will be affected, cautions Fin24 reader

Changes to the South African tax law relating to so-called "expat tax" will only impact those who are regarded as SA tax residents as defined by the Income Tax Act.

This is the message from Charles Arnestad, a CA(SA) and CFA Charterholder working in Abu Dhabi and who left SA in August 1996.  

"This change to the Income Tax Act will by no means impact all SA expats and certainly not all SA citizens," he says.

In his view, in many cases, financial emigration is likely not required as most expats will not be considered resident in South Africa for tax purposes.

"I am by no means claiming to be an expert on the changes to the Income Tax Act that come into effect on March 1, 2020, and am really not that interested in the topic other than correcting people who try to sell unnecessary financial services to people based on their ignorance," says Arnestad.

Fin24 reader Amit Lalloo, who put Fin24 in touch with Arnestad, wrote after reading a recent article on the so-called "expat tax". He points out that basically it would mean that SA tax residents working abroad will only be exempt from paying tax on the first R1.25 million they earn abroad. Thereafter, they will be required to pay tax on their foreign earnings.

It is also important to note that SARS will take your total remuneration into account and not just your salary. This means SA tax residents working in certain foreign countries and receiving additional benefits such as security, accommodation and transport could be taxed on the total value of the package.

READ | Expat tax is kicking in soon - here's what you should know

Lalloo points out that SARS follows a residency-based tax system, which means residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African source.

According to SARS, since tax systems differ from country to country, there is a chance that a particular amount could be taxed twice. This possibility of double taxation is, however, often alleviated by tax relief contained in various double taxation agreements (DTAs).

"Under South African law there are different types of residents, for example a resident defined by the Income Tax Act, in terms of the so-called 'physical presence test' and an ordinary resident defined in terms of South African common law," according to the SARS website. 

An individual will, for example, be considered to be "ordinarily resident" in South Africa, if SA is the country to which that person 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".

Even if an individual is not ordinarily resident in South Africa, he or she may still meet the requirements of the physical presence test and will be deemed to be a resident for tax purposes.

"If the individual is neither ordinarily resident, nor meets the requirements of the physical presence test, that individual will be regarded as a non-resident for tax purposes. This means that individual will be subject to tax only on income that has its source in South Africa, for example, interest earned from a South African Bank; rental income earned from a property in South Africa; and services rendered in South Africa," according to SARS.

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