Companies have been adjusting the remuneration packages of their employees who are working abroad and who will be affected by the change in tax legislation that became effective on 1 March 2020.
The foreign employment income tax exemption is limited to R1,25m per annum. The amount in excess of this threshold will be taxed in SA according to existing tax tables.
People who are affected most are those who are working temporarily in tax free or low tax jurisdictions and intend coming home to SA, says Arlene Leggat, president of the South African Payroll Association.
Payroll specialists need to do the proper tests to see who will be affected by the change and to ensure that their payroll systems – whether in SA or in the foreign country – are running properly.
Know the rules
“Companies and their payroll administrators must be sure they know what the rules are, and how to apply them. Make sure you know which of your employees may be impacted, communicate with them and do not leave them in the dark.”
She says it should not be the responsibility of the employee to decipher the law to understand how the changes will impact them.
It would be smart (for payroll administrators) to calculate the annual income to determine the amount of tax payable above the R1,25 m threshold and to ensure their system is able to calculate it.
Leggat says people who are on temporary assignments or work contracts abroad need to consider whether they remain tax resident in SA.
The South African Revenue Service (SARS) applies two tests to determine tax status.
The one is the ordinary tax resident test and the other is the physical presence (or days) test.
South Africans are ordinarily tax resident in SA if they have a permanent home in the country and intend returning there when the secondment or contract abroad comes to an end.
If they have a permanent home in the foreign jurisdiction and they have no intention of ever returning to SA, they are not tax resident in SA.
Therefore, their foreign income will not be subject to tax in SA.
In terms of the physical presence test they are not considered tax resident if they have been outside the country for 91 days in aggregate during the year of assessment and 915 days (183 days per annum) in aggregate during the five preceding years of assessment.
In most instances South Africans who are working abroad are being taxed on their foreign income in the host country.
SA has entered into double tax agreements with a multitude of countries to avoid double taxation.
This means a SA tax resident will receive credit in SA for the tax already paid on the income earned in the foreign jurisdiction.
Leggat explains that a package of R1,25m - converted into either British Pounds or US Dollars – comes to approximately £63,518 and $81,818 (at current exchange rates).
“It is not an impossible salary to earn, but it is certainly more than the average income (in those countries),” says Leggat.
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