Start date of expatriate tax filing season puts employers and expatriate employees on alert
The tax filing season for expatriates started on Sunday, 1 July and is a red-letter date for South African employers, considering the growing number of South Africans working in other African countries and the influx of foreign workers into South Africa.
“Not following the correct procedures can create a nightmare situation down the line for companies and expatriates alike,” says an Associate Director of Expatriate Tax at a leading Audit Firm, specialists in tax, business advisory and auditing services.
“For companies, if you do not have an audit trail, it can be virtually impossible to reconstruct your records after five years,” she says. “As for expatriates, a common problem encountered is when they retire and apply for a lump sum pay-out – only to have this declined because SARS will not grant a tax directive as no tax returns have been filed.”
To file or not to file
She says one of the biggest areas of tax season confusion is whether or not expatriates – whether South Africans working abroad or foreigners working in South Africa – need to file a tax return in the first place.
“The answer is yes, you do,” she says. “This may come as a surprise to many expatriates who mistakenly think they are exempt from filing returns. However, the reality is that filing a tax return is mandatory for all expatriates, outbound and inbound. ”
The only exception is when an employer has a SARS ruling, says Mohan. “Unless you have a specific SARS ruling that a return need not be filed, then file you must.”
Residence versus non-residence a key factor
A key factor when considering an expatriate’s tax status is whether the person is tax resident or non-resident in South Africa.
A tax resident is one who considers South Africa to be the place to which he will return from his wanderings. A non-resident may trigger tax residence status by virtue of physical presence in South Africa.
The difference in filing for a resident is he files a return disclosing worldwide income and capital gains, while a non-resident files disclosing his South African-sourced income and capital gains, subject to certain exclusions.
“Unless you have lived outside the country with a degree of permanence and have no intention of returning, an outbound expatriate – a South African working abroad – is required to tender an annual income tax return,” she says. “This means that South Africa may still operate taxing rights on a worldwide basis.”
Whether or not a tax resident is eligible for tax relief on employment income derived for services rendered outside the country will depend on the time spent outside South Africa. To qualify for relief from tax on employment income earned abroad, a resident working abroad must spend at least 61 continuous days outside South Africa and an aggregate of 184 days over any 12-month period.
“SARS applies this rule extremely strictly,” warns she. “I have yet to hear of anyone missing the 61-day period by even a single day and then successfully applying for tax relief in South Africa.”
Keeping meticulous records of periods in and out of SA
Furthermore, South African expatriates abroad must take special care to provide the correct proof of periods spent outside the country. She says SARS requires the following as proof:
- Passport copies for the tax year
- The person’s travel itinerary for the period
- Their employment contract or secondment letter
- Proof of tax paid or payable in the host country.
“It is important to note that all the dates on these different documents must correlate,” she says.
For example, if the employment contract or secondment letter gives a date on which a South African must report for duty in the host country, the same date must appear on their travel itinerary and passport copies.
Travel logs should not only include the number of days spent in and outside the country but also indicate work days versus non-work days, as this will influence the tax liability.
Foreign workers in SA
She says it is also a misconception that foreign workers (non-residents for tax purposes) do not have to register as taxpayers, file tax returns or pay tax in South Africa as long as they spend less than 183 days a year in the country.
“This is not true,” she says. While tax relief might be the end result, this is up to SARS to assess on the basis of the tax return filed.
Mohan says if there is no double tax agreement between South Africa and the country of origin, the non-resident would certainly be liable for tax in South Africa on income sourced here.
If a double tax agreement does apply, SARS will confirm its application before deciding if tax relief is applicable.
“As with residents working outside South Africa, non-residents in South Africa must file an annual tax return and keep rigorous travel records which forms part of the physical presence analysis test,” she says.
All in all, expatriate tax is an area rife with misperceptions and potential pitfalls, she says. “There is so much information for employers and employees to keep track of, and so many variables that come into play with cross-border tax. For optimal compliance, employers should certainly seek professional advice.”