Think Twice Before Tax Emigrating Due to Removal of Exemption for Foreign Employment Income
01 August 2017
David Warneke, head of Tax Technical at BDO South Africa, says that taxpayers should think twice before deciding that becoming non-SA tax resident is a good response if a current exemption for non-South African employment income is removed.
Treasury intends removing the foreign remuneration exemption contained in the Income Tax Act. The exemption currently exempts from income tax, remuneration earned for employment services rendered outside of SA of employees who are outside of SA for a more than 183 days in a 12-month period, of which the absence must be continuous more than 60 days. The exemption does not extend to governmental employees, employees of public or municipal entities or holders of public office.
The exemption was introduced in 2001 to prevent double taxation of employment income in SA and the host-country where the employment services are rendered. Warneke says that the reason for the proposed removal of the exemption is that it provides opportunities for double non-taxation if an employee works in a zero-tax country, for example Dubai.
“In this scenario, the income would neither be taxed in Dubai, nor in SA. This is perceived to be unfair and creates unequal tax treatment between employees in the private and public sectors. If the exemption is removed the employment income will become taxable in SA since SA residents are taxed on a worldwide basis. SA will levy income tax on the income and will give a credit for taxes suffered elsewhere. Taxpayers may consider ceasing to be a SA tax resident.”
“This can be achieved by ceasing to fall into the two-pronged definition of ‘resident’: ceasing to be ‘ordinarily resident’ in SA, in other words if SA ceases to be the individual’s true or real home and also ensuring that one falls under the threshold number of days present in SA in terms of the physical presence test for tax residence,” says Warneke. “SA tax residence may also be broken if an individual is deemed to be an exclusive tax resident of another country in terms of a double taxation agreement between SA and that other country.”
However, Warneke cautions that one of the consequences of ceasing to be an SA tax resident is that there is a deemed disposal of one’s worldwide assets (with certain exclusions such as immovable property in SA) at market value for SA capital gains tax purposes immediately before one ceases to be an SA tax resident. “Depending on the composition and value of one’s asset base relative to its base cost, the quantum of the capital gain triggered may be substantial. Since it is a deemed and not an actual disposal, this may create cash flow challenges to pay the capital gains tax without realising some of the assets.”
“The hidden costs of a decision to tax emigrate from SA therefore need to be carefully considered,” concludes Warneke. “The Draft Taxation Laws Amendment Bill proposes that the deletion of the exemption would come into effect for tax years commencing on or after 1 March 2019. It remains to be seen whether the proposal will be enacted.”
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