Should you even be paying tax?

Should you ever tell SARS about the money you earn overseas?

Sounds a bit unfair, right? Living in London isn’t cheap and having to pay tax locally ain’t nice. Is there a loophole? Let’s find out…

The first thing you need to know is that we use a residence based system of tax. So, as a South African resident, you’re taxed on your worldwide income. It all boils down to the definition of residence.

The second point is:

  • Are you ordinarily resident in South Africa or
  • Physically resident here?

So what does ‘ordinarily resident’ mean?

This applies to anyone who calls South Africa their home. After wandering the highways and the byways of the world, this is the place they return to.

But what if you happen to own a home in South Africa as well as sunny Portugal (not sure if it’s sunny – I hope so), and you spend six months here and six months in Portugal? Well, firstly, lucky you, but the real issue is, how to persuade SARS that Portugal is your main residence? Owning a home here would be a significant factor in determining ordinarily resident.

The problem for anyone working overseas is that you can be ordinarily resident even if you haven’t spent a single day here in the past year.

Now on to the second test…

Are you ‘physically resident’?

Not as cut and dried as you might think. What if for instance, you spend a month in South Africa on holiday – are you then physically resident?

The only way is to test and it depends on how many days you spend in South Africa. The first thing you need to know is how the South African tax year works.

Our tax year starts on the 1st of March and runs until the last day of February – so, 1st March 2016 to 28th February 2017. This is where we need to count the number of days we’re physically present in South Africa versus being outside South Africa. A day under this definition includes a part of a day and starts at 00:00. So if you arrive back in South Africa at 23:55 then you would be seen as being present for that day.

To be physically resident here:

  • 91 days needs to be spent in South Africa, and
  • 91 days in each one of the previous five years must have been in South Africa, and
  • 915 days in total over those five years must have been in South Africa

These days don’t have to be continuous, in other words, not one after the other. Five days here and ten there, all add to the total.

So when does SARS see you as physically non-resident?

It all starts from the day you leave South Africa. From the day you leave on a jet-plane (remember the song?), you need to be out of the country for 330 continuous days.

On a side note:
For someone who isn’t ordinarily resident in South Africa – let’s say, for example, an American citizen – they only become resident for tax purposes in South Africa at the beginning (1st March) of the sixth tax year he or she is physically resident in South Africa.

And what if those 330 days fall into two different tax years?

That’s fine. The 330 days may fall over two different tax years.

To summarise:

  • The ordinarily resident test is a legal one while
  • The physical residency test is determined by how many days you’ve been in South Africa, and whether you’ve been at least 330 continuous days outside the country.

Bit of a bummer, right? But there is some good news if you’re an employee working overseas.

Let’s say your company sends you overseas. That income earned overseas can be exempt from tax if:

  • You’ve been outside South Africa for more than 183 full days during the past twelve months, and
  • For a continuous period of more than 60 days during those twelve months
  • And the purpose of being overseas must have been for work purposes (Yip, that cruise in the Med doesn’t count)

So the 183 days needn’t be one after the other, but the 60 days do need to be. The twelve months also don’t need to fit into the tax year but must either start or end in the tax year concerned. By the way, government employees don’t qualify for this exemption.

Here’s how this works:

Paul is sent by his South African employer to El Salvador (Why not? I could have picked any place) for two years:

  • Paul leaves on the 1st October 2015
  • He comes back home for Christmas on the 15th of December 2015
  • He flies out on the 31st of January 2016
  • He is back in South Africa for Christmas and arrives on the 1st of December 2016
  • He flies out on the 15th of January 2017
  • His overseas contract comes to an end and he flies back on the 28th of February 2017

Tax year ended on the 29th of February 2016.

Paul was away for:

  • 31 days in October 2016,
  • 30 days in November 2015,
  • 15 days in December, and
  • 29 days in February 2016.

Remember that Paul needs to be 183 full days overseas. If we add up all the above we only have 105 days.
He will have to pay tax on the money earned overseas.
“But hang on,” I hear you say, “what about him being more than 60 days overseas?” Paul failed the 183-day test so the 60-day test doesn’t apply.

Tax year ended on the 28th of February 2017.

Paul was away from the 31st of January until the 1st of December 2016 and then a bit in 2017:

  • February 2016 – 29 days
  • March – 31 days
  • April – 30 days
  • May – 31 days
  • June – 30 days
  • July – 31 days
  • August – 31 days
  • September – 30 days
  • October – 31 days
  • November – 30 days
  • January 2017 – 16 days, and
  • February – 28 days

Remember the 183 day rule?
If we add up all the above we have 348 days. Paul passes test one.
The question now is: “Was Paul away for more than 60 days during the past 12 months?”
“Er, yes he was.” Then his income for the 2017 tax year is exempt from South African tax.

Be aware of double taxation

South Africa has an avoidance of double taxation agreements with various countries. Usually, these countries are ones with whom we have trade relationships. South Africa uses the credit system which simply means that a credit is passed to you, the taxpayer, for any income tax paid overseas.

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