Repeal of Foreign Employment Income Exemption

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The Proposed Amendments to the Draft Taxation Laws Amendment Bill

NOTE: The following article is an extract from information circulated by Galbraith Rushby on 21 July 2017


The much-anticipated Draft Taxation Laws Amendment Bill was released on Wednesday evening, 19 July. In this, the first in a three-part series we will present a summary of the key points that will affect you or someone you know. The comments on the draft Amendment Bill close on 18 August 2017, but the drafts will probably not change that much.

The first proposed amendment is the following:

Repeal of Foreign Employment Income Exemption

South Africa operates on a residency tax system in which a South African tax resident pays tax in South Africa on their worldwide income. This can cause issues when the source of that income is in a foreign country and that country may also wish to tax that income.

SARS introduced section 10(1)(o) to give tax relief to South African residents working internationally. In summary, the relief is granted if a person is outside of South Africa for more than 183 days in any 12-month period subject to various other requirements. SARS have said over the last two years they dislike this. In the latest budget speech, they announced the intention to amend the section, because they found that people were neither paying tax overseas, nor in South Africa. The point of the provision was to avoid double tax, not to create an opportunity for no tax to be paid anywhere.

There are two main components to this relief. The first component is for the crew members of ships and the second, for ordinary employees in foreign employment. The crew of ships are governed by section 10(1)(o)(i) and ordinary foreign remuneration is governed by section 10(1)(o)(ii).

The proposal is to repeal (delete) section 10(1)(o)(ii) from the legislation with effect 1 March 2019.

• The implementation date is set for 1 March 2019, therefore it would not affect your 2017/18 or 2018/19 tax years, but would affect your 2019/20 onwards,

This means is that there is no further exemption on the foreign remuneration earned from that date onwards for South African tax residents working internationally. There is, however, no mention of an amendment to section 10(1)(o)(i) and therefore I think that if you are a crew member of a ship then you would still qualify for your normal exemption, for now. A crew member of a ship is someone who forms part of the crew; being on a ship does not constitute being a crew member. If you work as crew on the yachts or shipping industry you probably will be unaffected by this.

SARS reasoning is that a person will not pay double tax because South African has 78 double tax agreements in place with 78 countries. I am certain this will be the main focus of the comments and I expect commentators to lampoon SARS – there are 196 countries, which means that we don’t have agreements with 120 of them. If you are therefore working in one of those 120 countries you could end up paying tax in both countries.

This amendment is only proposed to take effect from March 2019, so I assume that will be a mad dash to wrap up the 115 + DTA’s to go. A good example is that South Africa does not have a DTA with United Arab Emirates (Dubai). The problem is that most DTA’s we have in place don’t exclude the salary from being taxed in South Africa; it just allows that foreign tax which you have paid, to be a credit against your South African tax due.

My personal view is that I understand what SARS is aiming to do, but I think the way it is being introduced is unfair. This can be illustrated in the following two hypothetical examples:

  1. 1. Sally goes to work from a company in the UK and is on a two-year contract. She is earning £45 000 and is paying tax in the UK. She uses her net salary to pay her rent there and groceries and general living costs. She is on a two-year work visa and will return to South Africa at the end of her contract.

Article 14 in the DTA we have with the UK, says that both countries can tax that income and any foreign tax paid in the UK would be a credit back in South Africa. Previously she would have been exempt completely, because of the section 10(1)(o)(ii) exemption. She would therefore need to keep some money aside towards her South African tax obligations, even though she was not here for 2 years.

  1. 2. Tom works on the oil rigs and he earns R70 000 per month. He has a bond payment of R25 000 per month, property costs of R5 000 per month, domestic of R5 000 per month, retirement savings of R5 000 per month, insurances of R5 000 per month, medical aid of R8 000 per month, groceries of R8 000 per month, car costs and payment of R8 000 per month and a bit left over for personal odds and ends. He currently does not pay tax in South Africa, because he works for 8 months offshore on the oil rigs, then returns home.

He does not get relief in terms of the DTA because of where the oil rigs are situated. With the change, he would have a tax obligation in South Africa of about R22 000 per month. How would he pay that? He would possibly have to sell his house or retrench his domestic in order to now cover the new cost.

I think it is going to force people to rethink South Africa as being their place of tax residency. Expats will also avoid returning to South Africa and investing their offshore earnings back in South Africa, thereby escaping being seen as being a tax resident of South Africa.

Author: Galbraith Rushby

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