By Xolani Jadezweni, Individual Tax Consultant
Tax payable by South Africans working abroad is impacted by whether they will remain tax resident of South Africa. A natural person is a “resident” if he or she is either ordinary resident in the Republic or meets the physical presence test. South African tax residents are taxed on worldwide income in South Africa. A non-resident is subject to tax in South Africa on income from a South African source.
A number of exemptions and deductions may apply to income earned whilst outside South Africa. This article focuses on the exemption relating to foreign employment income (section 10(1)(o)(ii) of the Income Tax Act) earned outside of South Africa. This exemption applies to services rendered outside South Africa for or on behalf of an employer, for an individual who is outside of South Africa for a period / s periods exceeding 183 days (calendar days) in aggregate, during any 12 month period starting or ending during a tax year. The exemption only applies if the 183-day period includes a 60-day continuous period of absence from South Africa.
SARS recently issued Draft Interpretation Note 16 (Issue 2) (DIN16) for comment. When compared with the current version of Interpretation Note 16 (IN16), the DIN16 contains a shift in certain aspects of the tax exemption on foreign employment income. In calculating the 183/60 day periods, the DIN16 applies SARS’ previous practice (IN16) and takes into account weekends, public holidays, annual leave days, sick leave days and rest periods spent outside South Africa to determine the exemption. IN16 contains practical examples of the “183/60 day approach” and, based on practice, the determination of the exemption is relatively straightforward. A number of relatively complex issues may arise and employers need to evaluate the impact on its employees that render services offshore. DIN16 highlights that a “common misconception is that all remuneration received or accrued during the qualifying 12 month period of 12 months is exempt” and that only “the remuneration received or accrued in respect of services rendered outside the Republic during the qualifying period of 12 months is exempt”. SARS’ view is derived from the wording itself.
Essentially, DIN16 relies on apportionment, which acts as a “second step” to determine the exempt remuneration, if the 183/60 day tests have been met. The first test applies the 183/60 day rules, which take into account weekends, public holidays, annual leave days, sick leave days and rest periods, and, the second test applies SARS’ apportionment methodology which excludes any day not regarded as a “work day”. A “work day”, for DIN16 purposes does not include weekends, public holidays or leave days. Only days of actual services rendered are taken into account. In determining the tax exempt portion, the following apportionment formula should be used for DIN16 purposes:
Exempt portion = Work days outside South Africa for period X Remuneration received during period Total work days for period: 1 DIN16 also deals with the common scenario in terms of which employees are required to take rest periods, enforced by the home or host country’s health and safety regulations and states that no “actual services are rendered during the rest periods, even though the employees remain in continuous employment during these periods. The services that are rendered to earn the remuneration are the services that are rendered during the work shifts”. SARS is of the view that if “those services are rendered offshore and during a qualifying period, all remuneration attributable to those offshore services will qualify for exemption and no apportionment must be done”. This approach is uncertain as it may be that the 183/60 day rules are complied with, but it is not clear whether compulsory health and safety rest periods (which are not annual leave) are then regarded as “work days” outside South Africa. What if those compulsory rest periods are spent in South Africa – does it affect the “work day” driver in the apportionment approach? Practical examples in the final version of the DIN will assist.
In conclusion, it must be remembered that the burden of proof is on the taxpayer to show that an amount is exempt. Employers and individuals rendering services offshore need to take account of SARS’s contemplated approach under the DIN and ensure compliance with the Act.
Read more BDO Insights