- Key takeaway points:
- 1. Before 1 March 2020, all foreign income (as defined) was exempt
- 2. After 1 March 2020, the exemption is limited to R1.25 million
- 3. Certain conditions have to be met before the exemption can be applied
- 4. Independent contractors and individuals who are self-employed are excluded from this exemption.
- 5. Tax residency is NOT based on Citizenship.
- 6. You must notify SARS as soon as you cease to be a tax resident.
- 7. SARS will require certain supporting documents to verify your foreign income and residency status
What is foreign income exemption?
“Section 10(1)(o)(ii) provides for an exemption for foreign employment income received for services rendered outside South Africa, provided the requirements are met.”
Before 1 March 2020, if all conditions were met, the entire income was exempt.
The conditions include:
1. Be a tax resident of South Africa
2. Earn certain types of income (such as salary, taxable benefits, leave pay, Wage, overtime pay, bonus, gratuity, Commission, Fee, emolument, allowances including travel and advances, amounts received in respect of share vesting…)
3. In respect of services rendered by way of employment
4. Outside South Africa
5. During specified qualifying periods (see paragraphs that follow)
6. Have a formal employment contract (with a resident or non-resident employer)
Since 1 March 2020, the exemption is limited to R1.25 million if the conditions are met. Any remuneration received in excess of R1.25 million will be subject to normal tax rules in South Africa. Before 1 March 2020, the income would have been exempt if all conditions were met.
You must file your tax return even when you qualify for this exemption and the qualifying income must be declared under the relevant SARS codes.
Who is a tax resident?
Citizenship does not define tax residency. A tax resident is a person who is ordinarily resident or becomes a resident by way of a physical presence test, which requires one to be in SA for a certain period of time to be considered a tax resident. If you do not want to be a tax resident, your option is to financially emigrate However, emigration alone does not remove the residency status as the physical presence test may still be applied to determine your tax residency status.
You must notify SARS as soon as you cease to be a tax resident.
The physical presence test:
This is a calculation of the actual amount of time you physically spend in SA. You are considered a SA tax resident if you meet all of the criteria below:
1. 91 days in South Africa in the current year of assessment, and
2. 91 days or more in each of the preceding five years of assessment, and
3. 915 days in total during those five preceding years of assessment.
You fail the physical presence test if you fail to meet any one of the above criteria.
What are the qualifying periods?
An employee must be outside South Africa for certain periods to qualify for the exemption:
1. A period not exceeding 183 full days (in total) during
2. Any 12 month period (not a calendar year or a tax season) and
3. A continuous period exceeding full and unbroken 60 days during that 12 month period
Who does not qualify for this exemption?
2. People who are self-employed
3. A public office holder appointed or deemed to be appointed under an Act of Parliament
4. Employees who are employed in the national, provincial or local sphere of government, certain constitutional institutions, national and provincial public entities and municipal entities.
Supporting documents required by SARS:
1. Spreadsheet showing number of days in and out of SA
2. Copy of your passport showing days in and out of SA
3. Letter from your employer stating you’re allowed to work overseas (and for what periods), plus what amount was earned during that period
4. Foreign/ex-pat assignment employment contract
5. IRP5 showing foreign employment income earned (e.g source code 3651, 3653, 3655, etc.
We hope this was helpful. If you have any questions, feel free to use the comments section below or contact us here.