If you're a citizen who earns income from foreign sources, it's important to understand your tax obligations. Whether it's from employment, rental properties, dividends or interest, your earnings outside of the country could be subject to tax in SA. Join us as we explore the ins and outs of foreign income tax for South African residents, commonly known as "Expat Tax."

What is Expat Tax?

Expat Tax was introduced by the South African Revenue Service (SARS) to govern international earnings. It requires South African tax residents earning income abroad to declare and potentially pay taxes on this foreign-sourced income. Double taxation can be avoided through foreign tax credits, which permit offsetting taxes paid abroad against their tax liability in South Africa.

Foreign Income Tax Exemption

The good news is that certain exemptions are available to ease your tax burden and avoid double taxation. One significant exemption is provided under Section 10 of the Income Tax Act, which outlines conditions where a portion of income earned for services rendered outside of South Africa can be exempt from income tax. This exemption is capped at R1.25 million per annum, and you would have to meet the following criteria:

• Formal Employment Contract: This means you have a legal employment agreement with an employer, either based in South Africa or another country. 
• South African Tax Resident: Being a "tax resident" means that you are considered a resident of South Africa for tax purposes. 
• Specific Type of Remuneration: "Remuneration" refers to the income you receive from an employer. 
• Pass The 183-Day / 60 Continuous Day Test: To be eligible for certain tax exemptions, you must meet a test that checks the number of days you spend outside South Africa in a specific period. 

The 183-Day / 60 Continuous-Day Test

One of the key requirements to qualify for an exemption is what is known as the 183-day / 60 continuous-day test. To satisfy this test, you must spend at least 183 days in a consecutive 12-month period outside South Africa, with at least 60 of those days being successive and continuous. This includes all calendar days, such as weekends, public holidays, annual leave, sick leave and rest periods spent outside SA while employed.

How Do You Calculate Your Foreign Income Tax Exemption?

If you meet the necessary criteria, you could claim a tax exemption of up to R1.25 million. Any income exceeding this limit will be taxed at the applicable South African tax rates.

Let’s suppose someone works for an international company and earns R1.5 million from their foreign employment in a tax year. Since they meet all the requirements, they can claim an exemption on the first R1.25 million of her foreign income. The remaining R250,000 will likely be subject to South African income tax at the standard tax rates. This is of course a simplified interpretation, as there would be a number of factors influencing the final calculation.

Let’s look at another scenario: An individual earns R750,000 from their job while working abroad for 200 days, with 70 days being continuous. Now, let's calculate the non-taxable portion:

Total work days outside SA for the period = 200

Total work days for the period = 200 (Since they only perform their duties while abroad)

Remuneration for the period = R750,000

Non-taxable portion calculation:

(Work days outside SA / total workdays) x Remuneration

= (200/200) x R750,000

= R750,000

Thus, their entire foreign employment income of R750,000 qualifies for tax exemption, which means they won't owe any tax on this income in South Africa. 

Keep in mind that different types of foreign income, such as dividends, interest, rental income, trade income and royalties all have their own tax implications. This is why it is essential that citizens stay informed about the specific rules that apply to each type of income.

Foreign income taxation can be extremely complex, especially when it comes to determining the portion of your income that qualifies for tax exemption. To ensure you stay in the good graces of SARS, it’s vital that you consult with a tax professional. Book your consultation with Booysen Accountants today to get the help you need from qualified professionals. We will be with you every step of the way to guide you through the process and ensure a positive outcome.