Foreign income tax exemption for South Africans employed overseas

12 Jul 2019

Kicking the can down the rollercoaster: The tumultuous events and present stasis of the section 10(1)(o)(ii) amendment chronology

This article explores the original proposal for amendments to the tax exemptions available for South Africans employed overseas, and compares the impending changes in their current state to the original justifications for amendment.

Currently, section 10(1)(o)(ii) of the Income Tax Act, 58 of 1962, provides for an exemption in respect of foreign income earned by South African residents. The Draft Taxation Laws Amendment Bill, published in July of 2017, introduced a proposal to repeal this exemption. An Explanatory Memorandum published by the National Treasury clarified that the intention of the repeal was to amend the unforeseen consequences of the introduction of section 10(1)(o)(ii) in 2001.

Originally aimed at preventing the double taxation of the same employment income between South Africa and a foreign host country, the Government subsequently realised that the exemption created an opportunity for double non-taxation and an unequal treatment between taxpayers.

Double non-taxation has come about when the foreign country in which an employee works doesn’t impose income tax on the exempted income at all or does so but at significantly reduced rates. The unequal treatment between taxpayers arose due to the exemption only being available to employees in the private sector (and not to certain employees in the public sector – as listed in the section).

Within two months after the proposal of a repeal, sufficient backlash ensured that the intended repeal was reconsidered, and it was decided that it would rather take the form of an amendment than a repeal.

In terms of the amendment, the exemption will continue to apply, but will in future be limited to income of R1 million per year. This will have a severe impact on the tax position of multiple South African residents working abroad.

The minimalistic approach to the amendment, by inserting a R1 million limitation, might yet fulfil the intended aims of the repeal, while keeping interested parties’ concerns in mind.

According to a Draft Response Document published, an outright repeal of the provision would have had “a severely negative impact on finances, and remittances to South Africa, especially for those on relatively lower incomes. This includes amounts remitted to family members to fund living costs in [South Africa], investment of foreign income in some family run businesses and money spent in South Africa during visits.

Another comment suggested that due to reliance having been placed on the existing tax regime having remained unchanged since 2001, such a sudden and substantial change would be unfair; resulting in the implementation date of the amendment being postponed by a year.

As it stands, the amendment to section 10(1)(o)(ii) will commence on 1 March 2020. An opportunity for continued double non-taxation will therefore be tolerated until March next year, and R1 million of potential double non-taxation will in future be “allowed” by the South African Revenue Service.

Therefore, the effect of curbing double non-taxation still underlies the amendment but has been adjusted for the practical socio-economic considerations (as quoted above) that had been brought to the government’s attention after its initial proposal of a repeal.

Considering the so called discrimination between employees of the private and public sectors that was considered at the time of proposing the repeal of the section, the amendment does not change the position for the public sector workers at all. The proposed repeal would have affected those working in the private sector to the effect of placing everyone in the same position, i.e. no one (private or public sector) being able to rely on an exemption. However, the amendment does not have this affect and for public sector employees, the position remains the same as before – the exemption (even in its limited form) is still not available to them.

In summary, from the start of any year of assessment after 1 March 2020, the amended position of section 10(1)(o)(ii) will have to be kept in mind, essentially entailing a capped exemption of R1 million, and the exemption not being available to employees in the public sector as listed in the section. No doubt, the amendments will have a major impact on South African residents working in the private sector and earning income from employment abroad.

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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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