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 Two, will discuss record-keeping, tax season, and key income tax concepts.
Record-keeping for income tax purposes
All taxpayers, including foreigners, must keep accurate records of the following for income tax purposes:
• Tax certificates [IRP5, IT3(a), IT3(b), IT3(c)] and other supporting documents, such as travel logbooks.
• All documentation related to services rendered in South Africa.
• Income received from sources in South Africa, other than from employment.
• All the expenses incurred and claimed for tax purposes.
• All days inside and outside of South Africa. Legible copies of passport entries are sufficient evidence of entering and exiting South Africa.
• A record of any term of employment which requires that services be rendered outside South Africa.
A foreigner is required to retain ALL relevant documents in support of a tax return submitted for five years from the date when the tax return was received by SARS and produce such documentation should the tax return be subject to an inspection or audit.
The burden of proof to substantiate what is declared in a tax return rests on a taxpayer. Failure to retain sufficient evidence, for example, written support that a taxpayer has a contractual obligation to render services both inside and outside South Africa, will leave a taxpayer with some difficulty in satisfying SARS or proving to a court that such an obligation indeed exists.
Tax season
The following aspects are important to note:
- Employer filing season: This is a period in which all registered employers are required to submit employees’ tax (PAYE) declarations. In this way, SARS receives details of an employee’s employment income and is therefore able to offer a
pre-populated and customised tax return.
- Pre-populated tax return: The information received from the employer is inserted into the tax return so that the foreigner only needs to verify the information and add any income and expenses from other sources within South Africa.
- Customised tax returns: The return is designed to suit the factors that impact a foreigner’s tax affairs.
- Improved electronic service: SARS’s eFiling service enables a foreigner to complete and submit returns at his or her comfort and convenience. The foreigner can also visit a SARS branch office where a SARS employee can assist him or her to complete and submit returns electronically.
The due dates for manual submissions, electronic submissions by non-provisional taxpayers and electronic submissions by provisional taxpayers are available on the SARS website.
Meaning of key income tax concepts
Before addressing how to compute a foreigner’s tax liability and the tax treatment of the most important components of that foreigner’s taxable income, it is necessary to define some of the most important concepts that are discussed in this guide.
Gross income – refers to the total amount (excluding amounts of a capital nature) received by or accrued to any person within a year of assessment. The receipts and accruals may be in cash or in any other form if the monetary value can be established. As a foreigner, only amounts received from a South African source will be included in gross income.
The Act defines “gross income” in relation to a non-resident as the “total amount, in cash or otherwise, received by or accrued to” an individual (excluding receipts of a capital nature) in any given year of assessment, from a source within South Africa. Therefore, gross income will include some components of a foreigner’s remuneration package plus some of the
amounts received from other sources in South Africa. A foreigner will pay income tax at the same rate as a resident and is generally entitled to the same deductions and rebates as a resident. It is internationally accepted that income from employment should be taxed in the country where the services are rendered, irrespective of the place where the contract is
entered into, where the employer is based or where the remuneration is paid. South African legislation and case law support this principle. In other words, a foreigner working in South Africa is liable for income tax under domestic law for employment income earned in South Africa.
The tax position of a foreigner may, however, be affected by a tax treaty that has been entered into between South Africa and the government of the foreign country if the foreigner is regarded as a resident of that other country for tax purposes.
Generally, a foreigner’s remuneration package consists of:
• salary – the salary is taxable (bonuses are also taxable);
• allowances – allowances are generally also taxable (although a foreigner may be entitled to a deduction for some of the related expenditure he or she incurs); and
• benefits – some benefits received are taxable, whilst others are not.
Income from other sources may include, amongst others, trading profits, directors’ fees, rental income, and pensions. All these amounts are added together to arrive at a foreigner’s gross income.
Exempt income – refers to the type of income that may be received by or accrued to a person on which no tax is imposed. For instance, a portion of local interest received or accrued is exempt from tax.
Deductions – refers to expenditure or losses actually incurred by a person during a year of assessment in the course of producing income which that person is allowed to deduct against that income. The relevant deductions can only be claimed against the income it relates to. For example, a person may not claim expenses incurred for business purposes
against his or her salary income received from his or her employer. Each trade is initially looked at separately, and if there is a tax loss in any trade, the tax loss may qualify for set-off against the taxable income of the person’s other trades. Secondly, deductions may only be claimed to the extent allowed by the law; for example, there are limitations to the extent to which expenditure incurred will be allowed as a deduction against an allowance received from the employer.
Taxable capital gains – when an asset situated in South Africa is sold or disposed of or is deemed to have been disposed of under the law, there is a possibility that the profit on the disposal will be included in taxable income under the capital gains tax provisions of the Act.
Year of assessment – the year of assessment for individuals runs from the beginning of March in one year to the end of February in the following year.
Income tax liability – refers to the amount of tax a person is liable to pay for the year.
Employees’ tax – is the amount of money that an employer who is resident in South Africa deducts (or withholds) from an employee’s remuneration each month and pays over to SARS as part-payment of that employee’s annual tax liability. The amount is calculated according to an employee’s level of earnings using the applicable tax rate. The system whereby employees’ tax is deducted and accounted for on a monthly basis is also referred to as Pay-As-You-Earn (PAYE).
At the end of each month, all employees receive a notice of their remuneration (payslip), which indicates a deduction of employees’ tax. The deduction is an estimate of the employees’ income tax liability for the year spread over 12 months, which their employer is obliged to withhold and pay over to SARS.
A foreigner’s South African-sourced employment income is subject to monthly employees’ tax if paid by an employer who is resident in South Africa. Other income from a South African source is subject to income tax and may be subject to provisional tax.
Applicable tax rate – every year during the Budget Speech, the Minister of Finance announces the tax tables which will apply to each income group (tax bracket) in the coming year of assessment.
Article three will discuss how to determine a foreigner’s tax liability, benefits and exemptions.