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.
Income
Gross income less exempt income = income
Expenses incurred in the course of a foreigner’s duties may be deductible against any income earned by the foreigner. The deduction of expenses is explained below.
Deduction of expenses
The Act sets out which expenditure qualifies for a tax deduction, and in some instances the method for calculating the tax-deductible amount. This guide discusses some of the more likely items of expenditure an employee may incur and which may qualify for a deduction. It is essential that a foreigner keep accurate records and supporting documentation of the expenditure incurred. These records and supporting documents must not be submitted with the tax return but must be retained for a period of five years from the date when the return was received by SARS. It need only be submitted upon request by SARS.
Deductions for expenditure incurred in relation to allowances received
In the course of a foreigner’s duties as an employee, costs may be incurred on behalf of the employer which can be defrayed by either including certain allowances in the foreigner’s remuneration package, through amounts advanced to him or her or by the reimbursement of actual expenditure.
In relation to allowances received, an employee may only claim a deduction for the expenditure actually incurred by that employee in line with the principles and calculation methods set out below. The amount that may be claimed is limited to the amount of the allowance received. It is important to keep accurate records and supporting documentation of all expenditure and claims. No deduction may be claimed for amounts that are actually incurred by the employer; for example, the employer has reimbursed an employee for expenditure that the employee has incurred in the course of his or her duties.
In relation to advances and reimbursements, no deduction is available.
(a) Travelling allowance
This allowance is granted to an employee to cover costs incurred on travelling for business purposes. Eighty percent (80%) of the allowance is generally subject to the deduction of employees’ tax (PAYE) on a monthly basis. However, in the event that the employer is satisfied that at least 80% of the use of the vehicle for a year of assessment will be for business purposes, only 20% of the travel allowance or advance needs to be included as remuneration and is subject to employees’ tax on a monthly basis. The full allowance remains taxable on assessment unless an employee claims sufficient expenses incurred using his or her private vehicle for business travel. The calculation of the allowable deduction, which is limited to the amount of the allowance, is set out below.
Accurate travel records are required in order to claim a deduction of business-related travel expenses. Employees must substantiate their travel deduction by way of accurate written records of business travel (a logbook). Two methods may be used to calculate the deduction – the employee can choose either method A or B.
A) Actual business kilometres travelled during the year of assessment multiplied by the deemed rate per kilometre (Annexure B).
B) Actual business expenditure, that is, actual business kilometres travelled during the year of assessment multiplied by actual expenditure divided by total kilometres (Annexure B). The employee must be able to provide accurate information to substantiate the expenses.
The logbook must reflect the following minimum information:
- The odometer reading at the beginning of the year of assessment (1 March).
- The odometer reading at the end of the year of assessment (28/29 February).
- Details of business mileage, including date, destination, reason for the trip and kilometres travelled.
No deduction for travelling is permitted if detailed records are not kept. Expenditure on private travelling (for example, travel from home to office) is not deductible. If the allowance granted to an employee is for a vehicle that the employee has been granted the right to use (that is, an employer-owned company car), the allowable deduction is R nil.
(b) Allowance for accommodation, meals and other incidentals
An employee may receive an allowance to cover the cost of expenses he or she will incur for accommodation, meals and other incidentals incurred while away on business. The allowance would be applicable if the employer does not pay for or reimburse the employee for the expenditure incurred. As noted earlier, the allowance is fully taxable, but the employee will be entitled to a deduction against the allowance received if the employee is required to spend at least one night away from his or her usual place of residence in South Africa. The deduction is always limited to the amount of the allowance. The deduction available for accommodation is the actual expenditure incurred by the employee, limited to the allowance provided for accommodation.
The deduction available for meals and incidentals (commonly referred to as a subsistence allowance) may be calculated as follows:
- Actual expenditure, limited to the amount of the allowance (the employee must retain the supporting documentation to prove the expenditure incurred); or
- The amount as set by SARS and published in the Government Gazette. The amount for meals and incidentals for travel in the Republic is R335 per day and for incidentals R103 per day for the year ended 28 February 2015. The amount for travel outside the Republic depends on the particular country where the travel occurred – a list of the rates is available on the SARS website.
(c) Other allowances
Generally speaking, other allowances are fully taxable, and no deduction is permitted for related expenditure. For a more detailed explanation on how allowances, advances and reimbursements work, and how a deduction may be claimed, see Interpretation Note No. 14 (Issue 3) dated 20 March 2013, “Allowances, Advances and Reimbursements”.
Other allowable deductions, not associated with an allowance
An employee may be entitled to a deduction against his or her remuneration for the following items:
- Wear and tear of certain assets owned and used for purposes of his or her duties as an employee.
- Insurance policy premiums that provide cover against the loss of income as a result of illness, injury, disability or unemployment, provided the amounts payable under the policy will constitute income.
- Bona fide donations made to a public benefit organisation (PBO) approved by SARS.
Donations can be made either directly to the PBO or by the employer via the payroll system on the employee’s behalf. No deduction will be allowed unless it is supported by a valid prescribed receipt issued by the PBO. The deduction is limited to 10% of a person’s taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and any severance benefit) calculated before allowing any deduction for the donation made to the PBO or any deduction for medical expenses. A person must claim the amount reflected on all the receipts if donations are made to more than one PBO. The limitation will be calculated by SARS, and a rollover provision applies to amounts exceeding 10% of taxable income. For more information see the Tax Exemption Guide for Public Benefit Organisations in South Africa (Issue 4), available on the SARS website.
- An employee who is required to repay any amount that was previously included in that employee’s taxable income can claim as a deduction the amount actually repaid in the year of assessment in which it is repaid.
Subject to certain requirements and limitations, home office expenses (expenses that relate to that part of the house used for the purposes of trade) could be allowed as a deduction in determining taxable income. For more information on claiming home office expenses, see Interpretation Note No. 28 (Issue 2) dated 15 March 2011, “Deductions of Home Office Expenses Incurred by Persons in Employment or Persons Holding an Office”. ”.
An employee wishing to claim any of these expenses must be able to provide relevant supporting documentation upon request. An employee cannot claim deductions for private or domestic expenses. For more information on the deductions permitted to an employee, see Interpretation Note No. 13 (Issue 3) dated 15 March 2011, “Deductions: Limitation of Deductions for Employees and Office Holders”. ”.
Retirement fund contributions
(a) Pension fund contributions
An employee’s contributions to a foreign pension fund during the period of employment in South Africa will generally not qualify as a deduction for purposes of calculating his or her South African income tax liability. Certain tax treaties entered into by the South African government with a foreign counterpart provide exceptions to this rule. Only contributions (limited to 7.5% of pensionable salary) made to a South African-approved pension fund will be taken into account in determining the allowable pension deduction. All contributions to a South African registered pension fund must be disclosed on the IRP5 employees’ tax certificate. The amount reflected on the IRP5 certificate represents the employee’s contributions to the fund and must be claimed in the tax return. The full contribution must be disclosed on the tax return; any limitations will be calculated by SARS.
The limitations are as follows:
i. Current contributions
The deduction will be limited to the greater of:
- R1 750; or
- 7.5% of a foreigner’s gross retirement-funding employment income (pensionable salary).
No excess may be carried forward to the following year of assessment but may be available for offset against the taxable portion of a foreigner’s lump sum benefit upon retirement.
ii. Arrear contributions
Arrear contributions are permitted up to a maximum of R1 800 annually. Any excess contributions over R1 800 will be carried forward to the following year of assessment.
(b) Retirement annuity fund contributions
Contributions made to an approved retirement annuity fund during the year of assessment must be claimed in full in the tax return. The deduction will be limited as follows:
i. Current contributions
The deduction will be limited to the greater of:
- 15% of taxable income from non-retirement-funding income;
- R3 500 less current deductions to a pension fund; or
- R1 750.
Any excess will be carried forward to the following year of assessment.
ii. Arrear contributions
Arrear contributions are permitted up to a maximum of R1 800 annually. Any excess contributions over R1 800 will be carried forward to the following year of assessment. Proof of payment, being a certificate from the fund or insurer, must be available on request.
(c) Provident fund contributions
Contributions to a provident fund do not qualify for a deduction.
Medical expenses
Medical scheme contributions and medical expenditure could be paid by either the employer or the employee. Should the employer pay the medical scheme contribution for or on behalf of the employee or the employee’s dependants, the payment will be included in the employee’s income as a taxable benefit. In calculating the medical scheme fees tax credit (MTC) or additional medical expenses tax credit (AMTC) available to the employee for medical contributions or expenses, the employee is deemed to have paid the expense even if that expense is paid by the employer.
Any contributions paid by the employer to foreign medical aid schemes will be treated as a taxable fringe benefit in the hands of the employee. In calculating any deduction the employee is entitled to, the employee is deemed to have paid the expenses.
(a) Medical scheme fees tax credit (MTC)
The MTC is a tax rebate available to taxpayers who contribute to a registered medical scheme. In other words, the MTC is deductible from any income tax payable by the taxpayer and is not a deduction against the taxpayer’s income.
The following definition applies in the context of the MTC.
Dependent
A “dependant” is defined as:
(a) the spouse or partner, dependent children or other members of the member’s immediate family in respect of whom the member is liable for family care and support; or
(b) any other person who, under the rules of a medical scheme, is recognised as a dependant of a member.
If a foreigner pays contributions to a registered medical scheme for his or her own benefit, or for the benefit of his or her dependants, an MTC equal to:
- R257 per month for the foreigner; or
- R514 per month for the foreigner and one dependant; or
- R514 per month for the foreigner and one dependant, plus R172 per month for every additional dependant, will be allowed as a credit against the income tax payable by the foreigner for each month in that year of assessment for which medical scheme contributions are paid. The deduction will be limited to the tax payable and cannot create a refund.
Certain medical-related arrangements or products are marketed by entities that are not regulated by the Medical Schemes Act, for example, long-term insurers. These products do not qualify for an MTC in South Africa; similarly, if a foreign product is marketed by an entity that is not regulated under legislation that is similar to the MS Act, it will not qualify for an MTC. A South African employer who makes contributions to a foreign medical scheme in respect of an employee has the obligation to determine whether the legislation which governs such a foreign scheme is similar to the provisions of the MS Act and whether such contributions will therefore qualify for an MTC.
(b) Additional medical expenses tax credit (AMTC)
The following definitions apply in the context of the AMTC.
Dependent
A “dependant” is defined as:
(a) a person’s spouse;
(b) a person’s child and the child of his or her spouse;
(c) any other member of a person’s family in respect of whom he or she is liable for family care and support; and
(d) any other person who is recognised as a dependant of that person in terms of the rules of a medical scheme or fund contemplated in section 6A(2)(a)(i) or (ii), at the time the fees contemplated in section 6A(2)(a) were paid, the amounts contemplated in paragraphs (a) and (b) of the definition of “qualifying medical expenses” were paid or the expenditure contemplated in paragraph (c) of that definition was incurred and paid;
“Qualifying medical expenses” comprise the following:
(i) Expenses that have been paid by the foreigner during the year of assessment to any duly registered:
- medical practitioner, dentist, optometrist, homoeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist for professional services rendered and medicines supplied to the foreigner or any dependant;
- nursing home or hospital or any duly registered or enrolled nurse, midwife or nursing assistant (or to any nursing agency for the services of such nurse, midwife or nursing assistant), for illness or confinement of the foreigner or any dependant; and
- pharmacist for medicines as prescribed by a person mentioned in the first bullet point above for the foreigner or any dependant.
The abovementioned expenses will only qualify as a deduction if they are not recoverable from a medical scheme.
(ii) Expenses listed above paid and incurred by a foreigner outside South Africa and which are not recoverable from a medical scheme.
(iii) Any expenses that are prescribed by SARS that are necessarily incurred and paid by a foreigner in consequence of any physical impairment or disability of the foreigner or any dependant.
Disability
A “disability” is defined as:
“Disability” means a moderate to severe limitation of a person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment, if the limitation:
(a) has lasted or has a prognosis of lasting more than a year; and (b) is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner. The foreigner claiming the AMTC, the person with the disability and the medical practitioner are all required to complete a Confirmation of Diagnosis of Disability (ITR-DD) form, which must be retained by the foreigner and only submitted to SARS if requested. The ITR-DD is available on the SARS website.
Physical impairment
The term “physical impairment” is not defined in the Act. However, in the context of the now repealed section 18(1)(d), it has been interpreted as a disability that is less restraining than a “disability” as defined. This means the restriction on the person’s ability to function or perform daily activities after maximum correction is less than a “moderate to severe limitation”. Maximum correction in this context means appropriate therapy, medication and use of devices.
Child
A “child” is defined as:
“Child” means a person’s child or the child of his or her spouse who was alive during any portion of the year of assessment and who on the last day of the year of assessment:
(a) was unmarried and was not, or would not have been had he or she lived:
(i) over the age of 18 years;
(ii) over the age of 21 years and was wholly or partially dependent for maintenance upon the person and has not become liable for the payment of normal tax in respect of such year; or
(iii) over the age of 26 years and was wholly or partially dependent for maintenance upon the person and has not become liable for the payment of normal tax in respect of such year and was a full-time student at an educational institution of a public character; or
(b) in the case of any other child, was incapacitated by a disability from maintaining himself or herself and was wholly or partially dependent for maintenance upon the person and has not become liable for the payment of normal tax in respect of that year;
Persons under 65 years of age
In addition to the MTC, a foreigner who is below the age of 65 will be entitled to an AMTC that is limited to 25% of the aggregate of the amounts referred to below if it exceeds 7.5% of the foreigner’s taxable income (excluding certain retirement-related lump sums and withdrawals) before taking into account this deduction:
- All contributions paid by a foreigner to a registered medical scheme for the benefit of that foreigner or his or her dependant that exceed four times the MTC to which the foreigner is entitled; and • Actual qualifying medical expenses (including physical impairment expenses) paid by the foreigner and not recoverable from the medical scheme, for the foreigner and any dependant at the time such expenses were paid.
Persons 65 years of age and older
If the foreigner is 65 or older, he or she will, in addition to any MTC, be entitled to an AMTC, being the aggregate of:
- 33.3% of the total amount of contributions paid by the foreigner to a medical scheme exceeds three times the amount of the MTC to which that foreigner is entitled; and
- 33.3% of the amount of qualifying medical expenses.
Persons with a disability
If the foreigner, the foreigner’s spouse or child is a person with a disability, that foreigner will be allowed an AMTC equal to the aggregate of:
- 33.3% of the total amount of contributions paid by the foreigner to a medical scheme exceeds three times the amount of the MTC to which he or she is entitled; and
- 33.3% of the amount of qualifying medical expenses.
The list of prescribed qualifying physical impairment or disability expenditure is available on the SARS website.
Taxable capital gains
This guide only deals with the basic principles applicable to capital gains and losses in respect of foreigners. For more information, see the SARS website for the:
- Comprehensive Guide to Capital Gains Tax (Issue 5), published as a draft for public comment;
- ABC of Capital Gains Tax for Individuals (Issue 8);
- ABC of Capital Gains Tax for Companies (Issue 6); and
- Guide for Valuations of Assets for Capital Gains Tax Purposes
A foreigner who has a net taxable capital gain must include that amount in his or her taxable income. A net capital loss may not be deducted in arriving at the foreigner’s taxable income but may be carried forward and set off against any capital gain derived in the subsequent year of assessment.
The next article will discuss capital gains tax, tax on foreign entertainers and sportspersons and provisional tax.