Experts on expat tax: Too little, too late, Tito

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Budget 2020 includes "a desperate attempt" – and a little too late – to change the minds of those South Africans already changing their tax residency to avoid the impact of changes to so-called expat tax which come into effect on March 1, 2020.

This is the view of Jonty Leon and Jean du Toit of Tax Consulting SA.

In December 2017, the change to the foreign employment income exemption was promulgated into law and became widely referred to as the "expat tax".

The exemption was capped at R1 million, meaning that South African tax residents earning foreign employment income above this threshold would no longer be exempt from tax in South Africa.

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In his Budget speech on Wednesday, Finance Minister Tito Mboweni, however, announced that an increase in the exemption cap to R1.25 million.

"The increase will unfortunately assist with only a small group of South Africans working abroad, and merely dangles a carrot for the rest of those abroad to entice them to remain within the South African tax net," comments Leon.

Du Toit, also of Tax Consulting SA, says stakeholders have consistently warned National Treasury since the start of the proposal to cap the tax exemption for expats, that implementing the change would lead to more people terminating their South African tax residency.

"The response from government at that point was that the formalisation of non-residency in those cases was to be encouraged," says Du Toit.

"This view was short-sighted and has come back to haunt government as South Africans have in many cases chosen to financially emigrate and thus cease their tax residency with South Africa to avoid paying the expat tax."

Leon adds that the big issue which has been raised on numerous occasions with government is the issue of fringe benefits, which are taken into account regarding the exemption cap.

"In many cases these fringe benefits deplete the exemption before one even considers the cash component of their salary to be taxed," says Leon.

For him it seems that, as there has been a massive increase in South Africans ceasing residency to avoid the change in legislation, government has taken notice and hence the increase of the cap to R1.25 million instead of R1 milllion.

"The current loss of revenue and potential future loss with South Africans continuing to cease residency means that the expat tax has backfired before it has even become effective," comments Leon.

"The expat tax will continue to be disadvantageous for the South African tax resident, as well as for the South African tax base."

In the view of Leon and Du Toit, the "tide" of South Africans making up their mind to "divorce" South Africa fiscally and formally letting government know their intentions to leave the fiscal net, will probably not be impacted by Budget 2020.

To the contrary, they think it may cause an accelerated effect, as the taxpayer has until March 1, 2021 to exit under a formalised dispensation.

* Compiled by Carin Smith

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