How Does SARS Have the Authority to Tax Me If I Earn My Income Abroad?
Many South African expats believe that the South African Revenue Service (SARS) has no right to tax the income they earn from a source outside of SA. However, this is simply not true.
SA operates on a residency-based tax system, not a source-based tax system. This ultimately means that SARS taxes South African residents on their worldwide income, compared to South African non-residents, who are only taxed on income that is sourced within SA.
Luckily, this is where a DTA comes in.
Through a formal application to SARS, the DTA process is a mechanism through which outbound expats temporarily change their South African tax residency status from residents to non-residents, which means that any foreign income earned is classified as non-taxable in SA.
Do I Still Need to File Tax Returns If I Am Working Abroad?
Once you have successfully applied the DTA process, you will still file a tax return and declare your foreign income to SARS. The difference is that you will do this as a non-resident, meaning that your foreign income will not be taxable in SA.
You are only exempt from filing a tax return if you have undergone the financial emigration process (i.e., permanently breaking your tax residency in SA).
Is There a R1.25m Limit on The Amount of Foreign Income That Is Exempt from Tax in Terms of The DTA Process?
Under the DTA process, there is no limit to the amount of foreign income that can be non-taxable in SA.
This mistaken belief stems from confusing the DTA process with the section 10(1)(o)(ii) exemption of the Income Tax Act, No. 58 of 1962 (“section 10 exemption”). The section 10 exemption is limited to the first R1,25m of foreign employment remuneration earned.
Before applying the section 10 exemption, one must meet certain requirements, and it should be noted that any foreign employment remuneration earned above this R1,25m threshold will be subject to normal income tax in SA.
If I Make Use of The DTA Process, Do I Avoid “Exit Tax”?
South African expats that have moved abroad permanently and have undergone financial emigration are liable for an “exit tax” which is a once-off, deemed capital gains tax on specific worldwide assets of an outbound expat. Essentially, SARS claims tax on certain assets of an expat as if they had been sold the day before the expat ceased to be tax resident in SA; this is a fictional sale of assets and more often than not, triggered the day before the expat leaves SA.
Many expats believe that the DTA process allows them to avoid paying this exit tax. This is incorrect. The exit tax is levied on a taxpayer by virtue of the taxpayer changing their tax residency status from resident to non-resident (either permanently through financial emigration or temporarily through the DTA process). Therefore, exit tax may also be payable under the DTA process.
The Next Steps
Navigating the DTA process is far from straightforward, with information on the subject not readily accessible. This is made even more difficult by the fact that there is a lot of misinformation passed around between expat communities. If in doubt, it is always best to seek advice from an expert.