If you are a South African and your employer asked you to work in another country for more than six months while payroll remained in South Africa and taxes were deducted against your income and paid to the South African Revenue Service (SARS), this article is for you. Let’s examine what you need to know about tax for South Africans working abroad.

Setting the scene: South African tax residents working overseas

You might have heard of the Section 10 foreign employment income exemption contained in the Income Tax Act, and we’d like to take a few minutes to discuss its application with you. Before we start, however, it is essential to note that utilising this exemption is complicated and can get highly technical, so it’s advisable to seek professional help to navigate exempting your income.

Attempting to DIY this alone without specialised tax knowledge could lead to errors with severe consequences. Incorrectly claiming the foreign employment income exemption can lead to disputes with SARS. Successfully resolving these disputes requires precise adherence to complex rules and deadlines, and compliance could result in lost tax benefits. Taxpayers, not SARS, are responsible for proving that income is exempt, which makes it imperative that it’s done right the first time.

Read more: What is the foreign income tax exemption in South Africa and how do you claim it?

What is the foreign employment income exemption?

The Income Tax Act contains a provision—section 10 (1) (o) (ii) of the Income Tax (or section 10 for short)—that allows a South African tax resident to apply to SARS to have up to R1.25 million of their income earned abroad excluded from their tax liability, provided that they meet all the requirements for utilising the exemption.

This foreign employment income exemption can be divided into two parts, which can be confusing and problematic, particularly when submitting an objection to SARS.

Read more: A comprehensive guide to the SARS foreign income tax exemption for South Africans working abroad.

Part 1: Proving eligibility for the foreign employment income exemption

The 12-month period for claiming the exemption often aligns differently from the South African tax year (March to February), making it critical to identify this specific 12-month period accurately. To qualify for the foreign employment income exemption, you must demonstrate that all conditions outlined in Section 10 of the Income Tax Act are met. This includes:

• Employment by an employer (not as an independent contractor) in a country outside South Africa.
• Physical presence outside South Africa for more than 183 days total and more than 60 consecutive days within 12 months. Note that these are calendar days, not working days.

It’s essential to distinguish these requirements from calculating the exempt amount, which involves comparing working days in South Africa to those spent abroad within the same 12-month period.

Read more: How the 183 days tax rule applies to you as a South African earning a foreign income.

Part 2: Demonstrating the amount of the foreign employment income exemption

Calculating the amount eligible for the foreign employment income exemption can be complex and varies significantly from case to case.
In an ideal scenario, determining the exempt amount is straightforward if your employer has accurately separated South African and foreign income on your IRP5 using the correct SARS codes. However, this is often not the case.

Common challenges in applying the foreign employment income exemption:

• Mismatched periods: The 12-month exemption period rarely aligns with the tax year, complicating calculations.
• Incorrect coding: Employers frequently combine all income on the IRP5 using general codes, making it challenging to isolate foreign income.
• SARS objections: Incorrectly calculated exemptions or coding errors often lead to SARS objections, which can take time to resolve.
• Employer non-compliance: Employers may need to fully understand the exemption, which can lead to errors in calculations, coding, or documentation if they do not.

To overcome these obstacles and successfully claim the foreign employment income exemption, you may need to:

• Provide detailed evidence: Demonstrate the specific 12-month period of foreign employment and the corresponding income.
• Utilise Section 82: Argue that the burden of proof lies with SARS to disprove the exemption, as Section 82 of the Income Tax Act outlines.
• Be prepared for appeals: Understand the objection and appeal process, including potential delays.
• Seek professional help: Consider consulting a tax specialist to navigate the complexities and increase your chances of a successful claim.

Once the relevant 12-month period is established, identifying foreign income becomes easier if:

• Your employer issued separate IRP5s for domestic and foreign income.
• The exemption period aligns with the tax year, and you worked exclusively abroad during that time.

However, if you worked domestically and abroad during the exemption period, calculating the exact exempt amount requires careful analysis.

Read more: How do I declare foreign income on my tax return?

Tax on foreign income in South Africa: calculating the exempt amount

To determine the exempt portion of foreign income, the ratio of working days spent abroad to total working days within the 12-month exemption period must be calculated. This ratio represents the exempt amount.
Timely submission of objections is critical due to strict deadlines. Objections must be lodged within 30 days of the tax assessment and 20 days of an invalid objection notice.

Read more: How much foreign income is tax-free in South Africa?

PAYE implications

The principles of Section 10 apply regardless of whether the employer is South African or foreign. However, claiming a refund for overpaid PAYE on exempt foreign income complicates matters. While the process is more challenging with a refund, the same level of care is required as with cases without refunds.

Understanding the taxation of foreign income in South Africa

The amendment of Section 10(1)(o)(ii) of the Income Tax Act, bringing foreign employment income back into the South African tax net, has led to significant confusion regarding the taxation of foreign income for South African residents.

Many mistakenly believe that working abroad automatically results in a hefty South African tax bill. This needs to be corrected. South Africa primarily taxes its residents on worldwide income, but exemptions and credits are provided as a means of relief against double taxation.

Read more: South African expat tax explained – maximising foreign income and minimising tax burdens.

Taxation of foreign income in South Africa

• Countries with income tax: If you work in a country with an income tax system, the taxes paid there can often be claimed as a credit against your South African tax liability (Section 6quat).
• Countries with no income tax: If you work in a country without income tax, your entire foreign income will be subject to South African tax unless you qualify for the foreign income exemption.

The foreign employment income exemption

Before 1 March 2020, if you met specific criteria (183 days abroad, 60 consecutive days abroad), your foreign income was exempt from South African tax. Since 1 March 2020, only the first R1.25 million of foreign income can be exempt, and any amount above that is taxable. However, tax credits for foreign taxes paid can still be claimed.

Examples of foreign employment income and taxation in SA

Example 1: Working in the USA A South African working in the USA for a short period will likely owe South African tax on their US income, but they can claim a tax credit for the US taxes paid.
Example 2: Working in Dubai A South African working in Dubai (no income tax) will owe South African tax on their Dubai income unless they qualify for the foreign income exemption. If they do not qualify, the entire Dubai income is taxable.
Example 3: Combining foreign and local income An individual who works abroad for part of the year and returns to South Africa for the rest will need to calculate their tax liability based on the combined income, considering the foreign income exemption and any applicable tax credits.

FinGlobal: cross-border tax specialists for South Africans

Understanding the tax implications of working abroad can be complex. It is essential to familiarise yourself with the tax laws of both your home country and the country where you work. While the foreign income exemption can offer substantial relief, individual circumstances may vary widely, so contact a specialist tax advisor like FinGlobal to optimise your tax outcomes. We can assist you in maintaining your SARS tax compliance status while ensuring you are not unduly double taxed and that you receive any tax refunds that SARS might owe you. To learn more about our suite of tax services for South Africans living and working abroad, leave your contact details below, and we’ll get in touch!