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 guide does not reflect on every possible scenario but clarifies most issues likely to arise in practice. It does not delve into the precise technical and legal detail that is often associated with tax and should, therefore, not be used as a legal reference.
Although this guide deals with income tax commitments, other requirements need to be met when a foreigner wishes to work in South Africa. A work permit, for example, will be required and is issued by the Department of Home Affairs.
This, article one in a series of articles, will provide the basis for residency tests before delving into taxation information.
Income tax in South Africa is governed by the provisions of the Act. Under the South African income tax system the following amounts are subject to income tax in South Africa:
• Amounts received by or accrued to persons other than residents (non-residents or foreigners) from a source within South Africa.
• The worldwide income received by or accrued to South African residents (residents).
Foreigners working in South Africa are therefore only liable for income tax on income earned by them in South Africa, irrespective of from where or by whom that amount is paid (subject to possible tax treaty relief).
Residency
- Possibility of becoming a resident
As the tax status of a resident and a foreigner may differ, it is important to determine the foreigner’s residency status. Two separate tests are applicable to determine whether a foreigner is a resident of South Africa for income tax purposes, namely:
• the ordinarily resident test, if he or she is ordinarily resident in South Africa; or
• the physical presence test, if he or she was not at any time during the relevant year of assessment ordinarily resident in South Africa but was physically present in South Africa for a specific period or periods.
The above tests are in line with international tax trends.
- The ordinary resident test
This is the first step in determining whether a person is resident in South Africa for income tax purposes. A natural person is resident if his or her permanent home, to which he or she will normally return, is in South Africa. A continuous physical presence is not a prerequisite to being ordinarily resident in South Africa.
The courts have held, in ascribing a meaning to the concept “ordinarily residentâ€, that it refers to, for example:
• Living in a place with some degree of continuity, apart from accidental or temporary absences. A person must be regarded as ordinarily resident if it is part of his or her ordinary regular course of life to live in a particular place with a degree of permanence.
• A residence that is settled and certain and not temporary and casual.
• Where a person normally resides, apart from temporary or occasional absences.
A natural person who becomes ordinarily resident in South Africa will become a resident for tax purposes as of the date that the person became ordinarily resident in South Africa.
It follows that any income that is received by or accrued to a person from a source outside South Africa, before that person becomes ordinarily resident in South Africa, will not be subject to income tax in South Africa, unless the person is regarded as a resident by virtue of the physical presence test.
- Physical presence test
This test is time-based and is only applicable to an individual who is not ordinarily resident in South Africa during the relevant year of assessment.
This test must be done annually to determine whether a foreigner is a resident for the year of assessment under consideration. The test consists of three requirements; that is, the foreigner must be physically present in South Africa for a period or periods exceeding:
• 91 days in aggregate during the relevant year of assessment under consideration;
• 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
• 915 days in aggregate during those five preceding years of assessment.
Under this test, a foreigner who is not ordinarily resident in South Africa only becomes a resident for South African income tax purposes as of the first day of the relevant year of assessment if that foreigner is physically present in South Africa for the periods as set out above.
A day includes a part of a day but does not include any day that the foreigner is in transit through South Africa between two places outside South Africa where that foreigner does not formally enter South Africa:
• through a “port of entry†as defined in the Immigration Act 13 of 2002; or
• at any other place as may be permitted by the Director-General of the Department of Home Affairs or the Minister of Home Affairs under the Immigration Act.
A foreigner who became a resident as a result of the application of the physical presence test and who is absent from South Africa for a continuous period of at least 330 full days after the day on which he or she ceased to be physically present in South Africa will be deemed not to have been a resident as from the day on which he or she ceased to be physically present in South Africa, that is, from the day following the day on which that foreigner left South Africa.
- Foreigners who are residents of another country under a tax treaty
A foreigner who is deemed to be exclusively a resident of another country for purposes of a tax treaty is excluded from the definition of “residentâ€. It follows that while a person may qualify as a resident under the ordinarily resident or physical presence tests, that person will not be regarded as a resident for South African tax purposes if that person is a resident of another country when applying a tax treaty.
Based on the above discussion, the determination of whether a natural person qualifies as a non-resident can be illustrated as follows:
Insert diagram one
Obligations under the tax law
Everyone whose income exceeds the tax threshold in any given year of assessment has to fulfil certain obligations under the tax law, which include:
• registering for income tax with SARS by completing and submitting an IT 77 application form (available on the SARS website or from any SARS branch office);
• completing and submitting tax returns within the prescribed time period, usually referred to as “tax seasonâ€;
• declaring income in a manner prescribed by the law;
• claiming allowable deductions against income in a manner prescribed by the law;
• keeping records for income and deductions for at least five years; and
• paying taxes due when they become payable.
It is very important that taxpayers complete their tax returns honestly and accurately. Certain penalties may be levied, and non-compliance may be subject to criminal sanctions if full and accurate disclosures of all receipts, accruals and expenses are not made in the tax return.
The fundamentals of tax for a foreigner
In the sections that follow, the tax treatment of the majority of elements that make up taxable income and how these elements are connected will be explained. However, it is important to keep in mind some fundamental considerations:
• Income from a South African employer for services rendered in South Africa (salary, bonus, benefits, allowances) is subject to South African employees’ tax (often referred to as Pay-As-You-Earn or PAYE), which is deducted on a monthly basis. South African employers must deduct employees’ tax from a foreigner’s income, while in the case of a foreign employer who is not a resident of South Africa, employees’ tax must be deducted by an agent that is resident in South Africa and who has the authority to pay any remuneration to the foreigner. Amounts paid or payable to a foreigner by an employer that is not resident in South Africa are not subject to the deduction of employees’ tax. The employee may be required to register as a provisional taxpayer to settle his or her South African tax liability.
• Income received by a foreigner for services rendered inside and outside South Africa could be apportioned based on the number of days worked in and outside of South Africa during a year of assessment.
• South African-sourced income received by, or that has accrued to, a foreigner from sources other than an employer (business, investment and rental income) may be subject to income tax and must be included in the foreigner’s gross income for the year of assessment.
• The law requires that the taxable income from each source within South Africa must be determined separately. This means that all expenditure relating to a specific source of income must be deducted from that source; for example, rental expenses must be deducted from rental income. Rental expenses cannot be claimed against income from other trades. Taxable income from all sources within South Africa is then added together, and assessed losses from particular trades are deducted in calculating a foreigner’s final overall tax liability.
• Broadly speaking, the unspent portion of any allowance received is added to a foreigner’s taxable income and will therefore increase his or her tax liability at the end of the year of assessment.
• The disposal by a foreigner of an asset situated in South Africa may result in a net capital gain, which could also be subject to income tax.
Article two will discuss record-keeping, tax season, and key income tax concepts.