South Africans living abroad have had to come to grips with their tax residency since tax law amendments brought them back into the tax net in March 2020. From this date, South African tax residents earning foreign employment income abroad can expect to receive tax exemption on only R1.25 million of their annual earnings, provided that they meet all the requirements for such exemption. One of these requirements is the 183-day rule. Let’s take look at what this means, practically speaking.
How does tax residency work in South Africa?
South Africa has a residence-based tax system, in terms of which it is possible for tax residents abroad to be taxed on their income back home. In other words, if you’re a South African tax resident, your tax obligation follows you wherever you may travel.
According to the South African Revenue Service, individuals have three possible roles in a residence-based tax system:
- Tax resident – is taxed in South Africa on both local and worldwide income.
- Tax non-resident – is only taxed in South Africa on locally sourced income.
Do I have to pay tax in South Africa if I live abroad?
After 1 March 2020, only the first R1.25 million earned in foreign employment income will be eligible for tax exemption, provided that more than 183 days in a 12-month period are spent outside South Africa and, during this 183-day period, 60 unbroken days are spent outside South Africa.
Practically speaking, this means that any foreign income in excess of the R1.25 million exemption threshold will be taxed in South Africa at your applicable marginal tax rate.
Who does the 183-day rule apply to?
South African tax residents earning a foreign income abroad who wish to use the foreign employment exemption contained in section 10(1)(o)(ii) of the Income Tax Act 1962 must meet the requirements of the 183-day rule.
As an individual, you can only apply this exemption to certain types of income that relate to your foreign employment:
- taxable benefits;
- leave pay;
- overtime pay;
- allowance (including travel allowances, advances and reimbursements;
- amounts derived from broad-based employee share plans; or
- amounts received in respect of a share vesting.
In other words, the exemption (and thus the 183-day rule) does not apply to independent contractors, freelancers or individuals who are self-employed.
How does the 183-day / 60 continuous day test work for foreign income exemption?
- The 183 days rule includes all calendar days, which means we’re not just counting work days.
- Weekends, public holidays, annual leave days, sick leave days and rest periods spent outside of South Africa (as long as you’re employed at the time) all count toward meeting the 183-day condition.
- The consecutive 12-month period doesn’t refer to a calendar, financial or even a tax year. It’s simply any period of 12 successive months.
Did you know? The 183-day rule has temporarily become the 117-day rule
The Taxation Laws Amendment Act (TLAA) was amended on 20 January 2021 in order to provide a temporary reprieve on the 183-day requirement.
Under the amendment, South African resident taxpayers who earned their remuneration in respect of services rendered abroad can qualify for an exemption from income tax of up to R1.25 million. However, due to travel bans imposed as a result of the Covid-19 lockdowns, many individuals could not get into their countries of employment, and this meant that they would not have met the 183-day threshold which would have resulted in a rather large unanticipated, unfair South African tax liability.
The temporary amendment to this rule reduces the 183-day requirement by 66 days, providing some leeway for taxpayers who spent more than 117 days outside South Africa to still qualify for the exemption. This 66-day reduction is meant to offset the lockdown period from 27 March 2020 to 31 May 2020 when South Africa operated under Covid-19 Alert Levels 5 and 4 respectively.
There are a few things to be aware of when using the amended rule:
- The continuous period requirement of more than 60 days uninterrupted remains unchanged.
- The concession only extends to the total number of days spent outside South Africa.
- This amendment is not a permanent update to the exemption and applies only to any 12-month period during any year of assessment that ends on or after 29 February 2020 but on or before 28 February 2021.
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