South Africa taxes its residents on their worldwide income, irrespective of where it is earned or by whom it is paid. There are some instances in which the taxing rights of South Africa are limited by double tax agreements (“DTAs”) between South Africa and other countries, but these will not be covered in this article.
In addition to taxing South African residents on their worldwide income, South Africa also taxes income that is earned from a source in South Africa. In some circumstances, the Income Tax Act specifies the kind of income and the surrounding circumstances that are deemed to be income from a South African source. When the income in question is not specifically dealt with by the Act, the originating cause of the income must be interrogated to determine its source.
In this article we will discuss three possible scenarios for the taxation of employment income:
- A South African tax resident employed by a foreign company
- A South African tax resident who works abroad
- A non-South-African tax resident employed by a South African company.
A South African tax resident employed by a foreign company
Where a tax resident of South Africa is employed by a foreign company and that taxpayer works remotely from South Africa, the income earned will be fully taxable in South Africa, irrespective of the fact that the employer is located abroad.
John is a South African tax resident employed by an audit firm (“Audit@UK”) which is based in the United Kingdom (“UK”), but he works remotely from his home in South Africa. In this case, the R5 million they pay him will be fully taxed in South Africa, even though Audit@UK is not in South Africa.
A South African tax resident working abroad
Where an employee works in both South Africa and for example the UK, that employee may be entitled to an exemption in terms of section (10)(1)(o)(ii) of the Act, if they meet some additional requirements.
To benefit from the exemption, they must be employed outside of South Africa for more than 183 full days over any 12 months, and at least 60 of these 183 days must be one consecutive block of time.
This exemption was introduced to prevent double taxation of a person by both South Africa and the other country.
As from 1 March 2020 onward this exemption applies only to the first R1.25 million of foreign employment income earned for work done when the person is (physically) outside South Africa. This R1.25 million limit is not restricted to the cash salary – it also includes the value of all taxable benefits (for example a bonus or travel allowance) that the employee may have as part of their employment.
Foreign earned employment income over R1.25 million is subject to normal tax in South Africa, and the normal tax rates for the particular year of assessment apply.
John does the work for Audit@UK from a place outside South Africa. He is physically outside South Africa for 183 days, and at least 60 of these days are one continuous period. For the work done when he is outside South Africa, he earns R5 million. In this case John qualifies for the exemption on R1.25 million of this income. However, he will have to pay South African tax on the income over R1.25 million limit – that is, R3.75 million.
A non-South-African tax resident employed in South Africa
Non-residents in South Africa are only taxed on their South African sourced income. The exemption in terms of section 10(1)(o)(ii) will not apply because South African tax residency is a pre-requisite for this exemption.
Let’s assume that John is a non-resident of South Africa. John is employed by a South African company, but performs his employment services remotely from the UK. John’s remuneration from the South African company will be fully taxed in the UK, as it is not South African sourced income. Where some of his work does take place in South Africa, the DTA between South Africa and the UK will apply.
If you have worldwide income you should investigate the applicable tax regulations in South Africa to ensure that you are compliant. Otherwise, you may risk penalties or prosecution.
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.