Source: SARS Guide “LAPD-IT-G21-Guide-on-the-Taxation-of-Foreigners-working-in-South-Africa”
The purpose of this guide is to inform foreigners working in South Africa and their employers about their income tax commitments as well as to provide an overview of the South African tax system. This article, Part Six, will discuss the tax-free benefits, other taxable income, and exempt income received by foreigners.
Tax-free benefits
The following benefits are not subject to tax:
(a) Relocation costs
Payments by an employer to cover expenses such as the transfer of an employee on taking up employment, the transfer from one place of employment to another, or the termination of employment are exempt from tax in the employee’s hands.
The following expenses are also exempt in the hands of the employee:
- The expenses of transporting the employee, members of his or her household, and personal goods and possessions from the employee’s previous place of residence to his or her new place of residence.
- Any other costs that SARS may allow that have been incurred by the employee for the sale of his or her previous residence and in settling in the permanent residential accommodation at his or her new place of residence. Costs that SARS will consider allowing include, for example, bond registration and legal fees, transfer duty, cancellation of bond, agent’s commission on sale of previous residence, and telephone, water, and electricity connection. To simplify administration, SARS will allow an amount equal to one month’s basic salary if such an amount is paid to the employee to cover settling-in costs.
- The cost of renting temporary residential accommodation for the employee and members of his or her household during a period of not more than 183 days after his or her transfer took place or after his or her date of appointment.
An employee who may be required to sell personal assets upon temporary relocation to South Africa and who is reimbursed by the employer for any loss suffered as a result of such sale will be liable for income tax in South Africa on the amount so paid by the employer.
(b) Look-see trips
Payments by an employer to cover expenses relating to look-see trips or for the services of a relocation consultant, before or after accepting employment in South Africa, do not attract income tax in South Africa.
Other taxable income
(a) Royalties
Amounts received for the imparting of any scientific, technical, industrial, or commercial knowledge or information, commonly known as “know-how” payments, are specifically included in the definition of “gross income” and are taxable in a foreigner’s hands. Given that a non-resident is only subject to income tax on income derived from a source in South Africa, a foreigner will only be subject to South African income tax on know-how payments received from a source in South Africa.
A foreigner will have derived an amount of royalty from a source in South Africa if the royalty is:
- attributable to an amount incurred by a resident, unless that royalty is an amount attributable to a permanent establishment that is situated outside South Africa; or
- received or accrued for the use or right of use of or permission to use any “intellectual property” as defined in section 23I (essentially a patent, design, trademark, copyright, or property or right of a similar nature) in South Africa.
A final withholding tax of 15% (or a lower rate determined in a relevant tax treaty) is payable on royalties or similar payments made to a person who is a non-resident for the right of, or the grant of permission to use in South Africa:
- patents, designs, trademarks, copyrights, models, patterns, plans, formulas, or processes or any property or right of a similar nature; or
- any motion picture film, or any film or videotape or disc for use in connection with television, or any sound recording or advertising matter used or intended to be used in connection with such motion picture film, film, or videotape or disc.
The withholding tax must be paid over to SARS by the last day of the month following the month during which the royalty was paid.
A foreigner is exempt from the withholding tax on royalties if:
- that foreigner was physically present in South Africa for a period exceeding 183 days in aggregate during the 12-month period preceding the date on which the royalty was paid, or at any time during that 12-month period carried on business through a permanent establishment in South Africa; or
- The royalties are paid by a headquarters company in certain circumstances.
(b) Rental income
The source of rental income is generally regarded to be where the property is used on a day-to-day basis. Foreigners will, therefore, be subject to income tax on rental income that arises in South Africa, and expenses such as rates and taxes, bond interest, insurance, and repairs for such property may be claimed as a deduction.
(c) Business income
Business income received by or accrued to a foreigner from carrying on a trade or business within South Africa is taxable in South Africa, as such income will have been derived from a source in South Africa. The taxability of the income may be affected by the provisions of a tax treaty.
(d) Pensions and annuities
A pension or annuity payable to any foreigner for services rendered inside South Africa will be taxable in South Africa. The taxability of the pension may, however, be affected by the provisions of a tax treaty. The fund administrator is obliged to withhold employees’ tax on a monthly basis from any pension or annuity payment.
Annuities received from a source within South Africa, such as from retirement annuity funds, insurance policies, trusts, and estates, are subject to income tax in South Africa. However, the capital element of a purchased annuity is exempt from income tax. The certificate issued by the insurance company will reflect the capital content. Annuities are subject to the deduction of employees’ tax when the source is in South Africa. (The taxability of the annuity may be affected by the provisions of a tax treaty.)
(e) Share incentive schemes
Any gains or losses made by a foreigner on the vesting of equity instruments (essentially shares and options) that were acquired by the foreigner on or after 26 October 2004 by virtue of employment or the holding of the office of director and that are attributable to a South African source are subject to income tax in South Africa.
The requirements, circumstances, exclusions, and valuation methodology, as well as procedural matters relating to the inclusion or deduction of amounts that relate to the vesting of equity instruments in the hands of employees and directors, are prescribed in the Act. Gains or losses made that relate to “qualifying equity shares” acquired under a broad-based employee share plan contemplated in the Act are exempt from tax.
Unrestricted equity instruments vest (in other words, the valuation of the gain or loss and the trigger of the taxing event occur) upon acquisition of that instrument by the employee or director. By contrast, in the case of restricted equity instruments, the valuation and taxing event are generally deferred until the employee can freely trade with the equity instrument, being the point when all restrictions are lifted or are no longer applicable. Gains or losses under a wide range of employment equity schemes, such as share purchase schemes, share option schemes, deferred delivery schemes, and convertible debenture schemes, as well as vested or contingent rights in a share trust, will be taxable in South Africa.
The gain to be included in the employee’s income is generally the market value of the share at the date that the share vests, less any amount paid by the employee or director for the share or right.
Any gain or loss made on the sale of shares acquired under an employee share scheme will be subject to the ordinary capital or revenue rules. Generally, shares held as capital assets will be subject to CGT, while shares held as trading stock will be subject to income tax. For more information on this aspect, see the Tax Guide for Share Owners (Issue 4) dated 17 February 2014, available on the SARS website.
It may be necessary to apportion the gain made by a foreigner from the vesting of an equity instrument if the employment services for which the equity instrument was acquired were rendered both within and outside of South Africa. For more information, see Interpretation Note No. 55 (Issue 2) dated 20 March 2011.
“Taxation of Directors and Employees on the Vesting of Equity Instruments ”.
Exempt income (exemptions)
Exempt income refers to income that is not subject to income tax. The relevant amounts must nevertheless be included in the foreigner’s gross income before the relevant exempt amounts are deducted from gross income. This is because some types of income, such as interest, are only partially exempt. That is, the exemption is limited to a specific amount prescribed in the legislation. Interest and dividends are emphasized in this guide because they are the most common forms of exempt income received by foreigners in South Africa.
Interest and dividends
(a) South African interest and dividends
The Act makes specific provision for the exemption of interest received by or accrued to any person who is a foreigner. The full amount of interest is exempt from tax under this exemption, unless the foreigner was:
- physically present in South Africa for longer than 183 days in aggregate during the twelve-month period prior to the date that the interest is received or accrues; or
- at any time during the year of assessment, carrying on a business through a permanent establishment in South Africa.
To the extent that the foreigner does not qualify for the above exemption, there is also a further interest exemption available for local interest income received during a year of assessment. Interest received or earned from a South African source in the 2015 year of assessment is exempt up to R23 800 if a foreigner is younger than 65 years of age and up to R34 500 if a foreigner is 65 years or older. Dividends from South African resident companies are generally exempt from income tax but may be subject to the withholding tax on dividends at a rate of 15% (or such lower percentage as may be prescribed in an applicable tax treaty).
(b) Foreign interest and dividends
Foreign interest and foreign dividends are not subject to tax in the hands of a foreigner in South Africa, as such amounts are not from a source within South Africa.
Other exempt income
The other types of income that may be relevant to an employee and that may be fully or partially exempt include:
- pensions received from a social security system of a foreign country;
- certain foreign pensions;
- royalties or payments for authorship, if the royalty is taxable in a foreign country; and
- bursaries and scholarships for the employee and certain relatives.
The next article will deal with income, deductions, and allowances.