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.
General
Capital gains tax (CGT) is not a separate tax but forms part of the income tax system and is a tax on the disposal of capital assets. CGT is only applicable on the disposal or deemed disposal of an asset on or after 1 October 2001. Events that trigger a disposal include a sale, donation, exchange, loss, death, and cessation of residence in South Africa.
Foreigners are liable to pay CGT on any capital gain made on the disposal of the following assets:
- Immovable property in South Africa (that is, land and buildings) that does not constitute trading stock.
- Any right or interest in immovable property in South Africa (such as a long-term lease).
- Shares in a company if 80% or more of the market value of its net assets comprises immovable property in South Africa, and the foreigner holds directly or indirectly 20% or more of the shares in the company.
- Assets of a permanent establishment (that is, a branch of a foreign company) situated in South Africa.
The foreigner need not register separately for CGT if registered for income tax. However, if a foreigner is not registered for income tax purposes, for example, as a result of being a non-resident and receiving no taxable income in South Africa, and an asset in South Africa is disposed of by the foreigner, resulting in a taxable capital gain or an assessed capital loss, then the foreigner must submit an income tax return.
A capital gain on the disposal of an asset during a year of assessment equals an amount by which the “proceeds” (essentially the consideration received for the asset) received or accrued on the disposal exceed the “base cost” of the asset (essentially the expenditure incurred in acquiring the asset and, in certain circumstances, expenditure incurred in maintaining the asset).
A capital loss on the disposal of an asset during a year of assessment equals an amount by which the base cost of the asset exceeds the proceeds received or accrued on the disposal. Natural persons and special trusts are entitled to an annual exclusion of R30 000 of capital gains or losses during a year of assessment. The annual exclusion is increased from R30 000 to R300 000 for the year of assessment if the natural person has passed away.
CGT does not apply to the first R2 million of the capital gain from the sale of a primary residence.
In the case of natural persons and special trusts, only 33.33% of the net capital gain is included in taxable income when calculating the tax payable. For companies, close corporations, and trusts, 66.67% of the net capital gain is included in taxable income. Roll-over relief or deferral is available if the asset is either disposed of involuntarily and is replaced or is disposed of in order to acquire another similar business asset that qualifies for a capital allowance.
Withholding of amounts from payments to non-resident sellers of immovable property
With effect from 1 September 2007, a purchaser of immovable property (which has been disposed of for R2 million or more) is obliged to withhold the following amounts from the purchase price payable if the seller of the property is not a resident:
- 5% of the amount payable, if the non-resident seller is a natural person
- 7.5% of the amount payable, if the non-resident seller is a company
- 10% of the amount payable, if the non-resident seller is a trust
The withholding obligation applies to any immovable property situated in South Africa that is owned by a person who is not resident in South Africa. The non-resident seller may apply for a tax directive that no amount (or a reduced amount) be withheld if certain conditions are met. The local SARS branch office should be approached with details of the transaction should a tax directive be required.
The amount withheld by the purchaser is an advance payment of the seller’s liability for income tax for the year of assessment in which the seller disposes of the property.
The purchaser must pay the amount withheld to SARS within:
- 14 days after the date on which the amount was withheld, if the purchaser is a resident; or
- 28 days after the date on which the amount was withheld, if the purchaser is a non-resident.
Taxable income and calculating the foreigner’s tax liability
After subtracting exempt income and allowable deductions and adding taxable net capital gains to gross income, the result is taxable income. Taxable income is then multiplied by the tax rate (see Annexure A) that applies to a foreigner’s income bracket, and after deducting applicable rebates (see Annexure A), the
The figure obtained is the foreigner’s income tax liability for the year. The income tax liability is not necessarily the amount a foreigner will have to pay at the end of the year of assessment. During the year there may have been monthly payments made to SARS through employees’ tax (PAYE) deductions, and a foreigner may also have paid provisional tax. These amounts are offset against the normal tax liability, and any difference will either be a refund due to the foreigner or an extra payment due by the foreigner. The employer would normally pay any taxes that are due by the foreigner on his or her behalf to SARS if a foreigner is on assignment in South Africa on a tax-equalised basis.
Tax on foreign entertainers and sportspersons
Any resident who is liable to pay any amount to a foreign entertainer or sportsperson for his or her performance in South Africa must deduct or withhold from that payment an amount of tax, known as “tax on foreign entertainers and sportspersons,” at a rate of 15% on all payments made to such foreign entertainers or sportspersons. The resident who deducted or withheld the tax must pay it over to SARS on behalf of the foreign entertainer or sportsperson before the end of the month following the month in which the tax was deducted or withheld. Failure to deduct or withhold the tax and to pay the tax over to SARS will render
the resident personally liable for the tax. In the event that it is not possible to account for the withholding tax (for example, the person who is liable for the payment to the foreign entertainer or sportsperson is not a resident), the foreign entertainer or sportsperson will be held personally liable for the 15% tax that must be paid over to SARS within 30 days after the amount is received by or accrued to the foreign entertainer or sportsperson.
The 15% withholding tax on foreign entertainers and sportspersons is a final tax on such payments received by or accrued to the foreign entertainer or sportsperson. It therefore follows that if any other income is received by or accrued to the foreign entertainer or sportsperson from a source within South Africa, only such other income is subject to income tax in South Africa. Amounts received by or accrued to foreign entertainers or sportspersons, which are subject to this 15% withholding tax, do not have to be included in calculating their tax liability.
Any person who is primarily responsible for founding, organising or facilitating a specified activity in South Africa and who will be rewarded directly or indirectly for that function of founding, organising or facilitating must notify SARS of the performance within 14 days of concluding the agreement and provide SARS with the details relating to the performance as may be required by SARS. The 15% withholding tax on a foreign entertainer or sportsperson is not applicable to a foreign entertainer or sportsperson who is employed by a South African employer and who is physically present in South Africa for more than 183 days in aggregate in a 12-month period that begins or ends in a year of assessment in which the specified activity is exercised. In these circumstances the foreign entertainer and sportsperson has to pay income tax on the same basis as a resident, that is, at the prescribed rate of income tax, which may require the submission of an income tax return. In these circumstances no withholding tax needs to be deducted. Such payments, made by the South African employer to the foreign entertainer or sportsperson (employee), are regarded as remuneration, which is subject to income tax in South Africa by way of employees’ tax deducted by the South African employer.
Provisional tax
Provisional tax is not a separate tax but refers to provisional tax payments to be made by a provisional taxpayer to SARS in a manner provided by the Act. A foreigner who is subject to tax on employment income in South Africa but who is being remunerated by a foreign employer that does not have an agent having the authority to pay remuneration in South Africa may pay provisional tax. He or she must also complete an IT 77 form to register as a taxpayer.
A foreigner who earns taxable income that is not subject to employees’ tax deductions (for example, interest, rental income or business income) may be required to register as a provisional taxpayer and would then have to pay provisional tax on this income on a six-monthly basis. If no employees’ tax is deducted from the foreigner’s remuneration, the foreigner must ensure that his or her taxes are paid via provisional tax. A South African employer may be subject to penalties and interest for not withholding the correct amount of employees’ tax.
Provisional tax is intended to assist taxpayers in meeting their tax liabilities on an ongoing basis as opposed to paying a large amount once a year on assessment. The provisional tax paid (as in the case of employees’ tax) will be offset against the final income tax that the foreigner has to pay for the year of assessment.
Who is liable to pay provisional tax?
A provisional taxpayer is any:
- an individual who earns income other than remuneration, for example, business income or farming income;
- company or close corporation; or
- person who is notified by the Commissioner that he or she is a provisional taxpayer.
The following individuals are exempt from the payment of provisional tax:
- An individual below the age of 65 who does not derive any income from the carrying on of any business, and that individual’s taxable income for the 2015 year of assessment:
does not exceed the tax threshold of R70 700; or
derived from interest, foreign dividends and rental income from letting fixed property does not exceed R20 000.
- An individual who is 65 years of age or older and that individual’s taxable income for the 2015 year of assessment:
does not exceed R120 000;
will not be derived wholly or in part from the carrying on of any business; and
will not be derived otherwise than from employment income (that is, salaries and wages), interest, dividends or rental of fixed property.
The taxable amount of interest and dividends is determined by deducting a specified exempt amount from the total amounts derived. The specified exemption from the sum of interest and taxable dividends for the 2015 year of assessment is R23 800 for an individual below the age of 65 and R34 500 for an individual who is 65 years of age or older.
Foreign dividends and foreign interest will not be taxable in the hands of the foreigner, as such amounts are not from a source within South Africa. This means that a foreigner younger than 65 years of age who only receives a salary and interest from a South African bank will only qualify as a provisional taxpayer for the 2015 year of assessment if the total interest received exceeds R23 800 for the 2015 year of assessment.
When is provisional tax due?
Provisional tax is due as follows:
- First payment – six months after the beginning of the year of assessment, that is, 31 August.
- Second payment – not later than the last day of the year of assessment, that is, 28 or 29 February.
- A voluntary third or “top-up” payment – seven months after the end of the year of assessment, that is, 30 September. This is only necessary if the individual’s taxable income is in excess of R50 000. Payment can be made to avoid liability to pay interest that will arise due to the final income tax not being settled within seven months after the end of the year of assessment.
In the context of provisional tax, it is particularly important to note that if:
- a day notified by SARS or specified in the Act for payment, submission or other action; or
- If the last day of a period within which payment, submission or other action under the Act must be made falls on a Saturday, Sunday or public holiday, the action must be done not later than the last business day before the Saturday, Sunday or public holiday.
How much provisional tax must be paid?
A provisional tax return must be completed by estimating the foreigner’s total taxable income (which includes employment income, business income, interest and rentals) for the year of assessment and determining the tax payable on the estimate.
The estimate for the first payment may not be lower than the foreigner’s taxable income (as assessed by SARS) for the previous year of assessment (that is, the basic amount), unless permission is obtained from SARS. In the event that a foreigner has no assessed taxable income for a previous year of assessment, the foreigner must estimate his or her taxable income for the current year of assessment as accurately as possible. SARS may request a foreigner to justify an estimate submitted and may increase the estimated amount if that foreigner is unable to justify the estimate. The first payment must be half of the total estimated liability for the year of assessment.
The estimate of taxable income for the second payment must be equal to the total liability for the year of assessment. A foreigner (earning a taxable income of R1 million or less for the current year of assessment) who submits an estimated taxable income for the second period which is less than the basic amount and less than 90% of the actual taxable income for the year of assessment will be subject to a percentage-based penalty. A foreigner whose taxable income exceeds R1 million for the current year of assessment and whose estimate of taxable income for the second period is less than 80% of the actual taxable income for the year of assessment will incur a similar percentage-based penalty.
The tax payable on the estimated taxable income for the year of assessment must be determined by applying the rate of income tax applicable to that amount of taxable income or by using the tables (IRP 12) that are sent by SARS to all provisional taxpayers. Employees’ tax, medical scheme fees tax credits, additional medical expenses tax credits, any foreign taxes paid or proved to be payable by the provisional taxpayer to the government of another country and any provisional tax already paid during that year of assessment can be deducted from the provisional tax payable for the relevant period. For a more detailed discussion on this topic, see Draft Interpretation Note No. 1 (Issue 2) “Provisional Tax Estimates”.
The next article will list employer-related tax and other contribution matters.