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 Three, will discuss how to determine a foreigner’s tax liability, benefits and exemptions.
How to determine a foreigner’s tax liability
Introduction – Deriving taxable income
The amount of a foreigner’s tax liability is determined by applying the applicable tax rate to that foreigner’s taxable income. Calculating taxable income can be reduced to the following steps:
(1) Determine the amount of gross income derived by the foreigner. Gross income is the total amount (excluding amounts of a capital nature) received by or accrued to a foreigner in a given year of assessment from a source within South Africa.
(2) Deduct the aggregate amount of exemptions that the foreigner is entitled to from that foreigner’s gross income. The difference is known as income.
(3) Subtract allowable deductions available to the foreigner from his or her income and add any South African taxable capital gains derived by that foreigner. The result will be the taxable income derived by the foreigner that is subject to South African income tax.
The basic theoretical model for deriving taxable income is set out in the table below.
Gross income xxxxxx
less: Exempt income (xxxxxx)
--------Income xxxxxx
less: Allowable deductions (xxxxxx)
add: Taxable capital gains xxxxxx
--------Taxable income xxxxxx
Note: The concepts of receipts or accruals of income under the Act are different from the same concepts when used according to accounting principles. For example, certain income of a capital nature may be fully included for accounting purposes, while only a portion of that income may be included for income tax purposes.
The income tax payable on taxable income is determined by applying the tax rates for the year of assessment. A person is not required to apply the tax rates to determine the amount of income tax that is payable when completing a tax return. SARS will perform this calculation and notify the person of the outcome when that person subsequently receives his or her tax assessment.
Non-taxable amounts
It may happen that amounts are received which are not taxable and do not get included in gross income. Two common examples are advances and reimbursements.
Advances
An advance is an amount of money granted by a principal (employer) to a recipient (employee) when the employer requires the employee to incur business-related expenses on behalf of the employer. The employee is obliged to prove and account for the business-related expenditure to the employer. The employer recovers the difference from the employee when the actual expenses incurred are less than the advance granted, and vice versa.
There will be no tax implications for the employee. For example, there is no inclusion in gross income for the advance received and no deduction for the expenditure incurred.
Reimbursements
A reimbursement of business expenditure occurs when an employee has incurred business-related expenses on behalf of an employer out of his or her own pocket (that is, without having had the benefit of an allowance or an advance) and is subsequently reimbursed for the exact expenditure by the employer after having proved and accounted for the expenditure.
Generally speaking, there will be no tax implications for an employee who is in receipt of a reimbursement. That is, no deduction for the expenditure incurred may be claimed by the employee, and the employee is not required to include such reimbursement in his or her gross income.
If an employee receives an allowance and a reimbursement for the same expense for which he or she is entitled to claim a tax deduction, then the amount of the reimbursement must be added to the allowance and included in that employee’s gross income. For example, an employee who uses his or her private car for business purposes and who is able to claim a reimbursement for the distances travelled for business purposes. The reimbursement is added to the employee’s travel allowance upon submission of a tax return, and the combined amount is taxable, unless a deduction may be claimed for business travel against that travel allowance.
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 actually 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.
Apportionment of income
A foreigner’s income is only subject to tax in South Africa if it is from a source within South Africa. As explained, employment income is from a South African source if the services that generated that income were rendered in South Africa. This means that, ordinarily, a foreigner’s income from services rendered outside South Africa will not be subject to tax in South Africa.
The test is to determine what services the employee was engaged to perform and then to determine the location where those services were required to be rendered. While it is accepted that it is correct to apportion income if it is clear that it is derived from more than one source, if the services rendered outside of South Africa by the foreigner are merely casual and accidental, or subsidiary and incidental, then the source of the employment income will be fully South African.
Since the amount of income to be apportioned between South Africa and the foreign jurisdiction is determined by where the services are rendered, and not just where the foreigner is present, SARS accepts that workdays, as opposed to total days, are the correct method to apportion the foreigner’s income if a part of the income is not from a source in South Africa.
This may be illustrated as follows:
(Workdays inside South Africa / Total workdays for the period) × Employment income earned = Gross income subject to taxation in South Africa
“Work days” does not include weekends, public holidays or leave days. Only days of actual services rendered are considered. To the extent that incidental work days outside of South Africa are regarded as being from a source within South Africa, those days must be considered to be work days inside South Africa.
All amounts received in respect of employment may qualify for apportionment, including cash, allowances and taxable benefits granted in respect of the employee’s employment, unless the taxable benefit is received for exclusive use in South Africa.
Allowances
An allowance is an amount of money granted by an employer to an employee to defray business-related expenditure undertaken by the employee on behalf of the employer if the employer is certain that the employee will incur the expenditure. The employee is not obliged to prove or account for the business expenditure to the employer.
Allowances an employee may typically receive include a travel allowance, an allowance for accommodation, meals and incidentals when travelling for work, a cellular telephone allowance or a housing allowance.
The amount which is included in taxable income is the amount of the allowance less allowable expenditure. For ease of understanding, in this guide a practical approach has been adopted – the full amount of the allowance has been treated as taxable under gross income, and the deduction that the foreigner may be entitled to claim for the expenses incurred is dealt with separately.
Allowances form part of an employee’s remuneration and are therefore subject to employees’ tax deductions on a monthly basis. An employee may arrange with the employer to deduct and pay a higher amount of employees’ tax to SARS on a monthly basis than is necessary if he or she believes that expenditure incurred will not exceed the amount of the allowance. This could help prevent an employee from having to make a large cash payment at the end of the year to settle his or her total tax liability.
Taxable benefits
A benefit in kind, rather than in cash, received from the employer remains taxable under certain conditions. The Act prescribes the valuation methodology that should be used by the employer to determine the cash equivalent (taxable) value of the benefit. The taxable amount or cash equivalent of the benefit is equal to the value of the benefit less any contribution an employee makes towards the benefit. The taxable amount of the benefit is subject to the deduction of employees’ tax.
Examples of taxable benefits include the following:
• Free or cheap residential accommodation
• The use of an employer-owned motor vehicle for private purposes
• The acquisition of an asset from the employer, either free of charge or at a reduced cost (for example, if an employee stays in an employer-owned residence and the employer replaces any personal items which were stolen)
• The use of free or cheap services provided by the employer
• The private use of an asset owned by the employer
• Low-interest or interest-free loans from the employer
• Payment of medical scheme contributions for an employee and his or her dependants
• Payment of medical-related services and medicines for an employee and certain relatives and dependants
• The settlement of a debt on behalf of an employee by his or her employer or the release from a debt owed to the employer
The tax implications of the most common benefits will be discussed in the next article.