South African tax residents working abroad may be eligible for tax exemptions on foreign employment income under Section 10(1)(o)(ii) of the Income Tax Act. This provision allows qualifying employees to reduce their tax burden by exempting a portion of their foreign-earned income.

However, with recent changes introduced by SARS, including a capped exemption limit, understanding eligibility criteria and the nuances of the exemption has become crucial. In this article, we’ll unpack the foreign employment income exemption, examine qualifying requirements, and illustrate scenarios to help taxpayers navigate the rules with confidence.

What Is the Foreign Employment Income Exemption?

The exemption on foreign employment income was established to prevent double taxation on South African residents who earn an income abroad. It allows tax relief for individuals meeting specific residency and employment requirements, thereby ensuring that they aren’t taxed twice on income earned in another country. However, since March 1, 2020, SARS has limited the exemption amount to R1.25 million per year, meaning that foreign employment income over this threshold is taxable in South Africa.

Qualifying for the Foreign Employment Income Exemption

To qualify for the foreign employment income exemption under Section 10(1)(o)(ii), taxpayers must meet several criteria:

1. Residency and Employment Relationship:

• The exemption applies to South African tax residents employed by a company, not self-employed individuals. The term “employee” is strictly interpreted to exclude independent contractors, and only income earned in an employment relationship qualifies.

• Directors and office holders generally do not qualify for the exemption on fees received in these roles.

2. Remuneration Requirements:

• The exemption covers remuneration categories like salary, leave pay, commission, and allowances earned for services rendered outside South Africa.

• Payments unrelated to active service, such as severance packages or termination fees, are not eligible for exemption.

3. Minimum Time Spent Outside South Africa:

• To qualify, the individual must spend more than 183 full days (not necessarily consecutive) outside South Africa within any 12-month period.

• Additionally, this 12-month period must include at least one continuous period of more than 60 full days abroad.

4. Exceptions:

• Certain employees, including public office holders and government workers as defined by Section 9(2)(g) and Section 9(2)(h), are expressly excluded from qualifying for this exemption.

The R1.25 Million Cap on Exempt Foreign Employment Income

Before March 1, 2020, foreign employment income that met the criteria was fully exempt. However, under the updated SARS regulations, the exemption is now capped at R1.25 million. Any foreign employment income over this amount will be subject to normal South African income tax rates.

For example, if a taxpayer earns R1.5 million in foreign employment income, only R1.25 million would be eligible for possible exemption, while the remaining R250,000 would be taxed according to South African tax brackets. This capped exemption limits tax relief for high earners, making it crucial to calculate tax liabilities carefully and consider the implications of any tax treaties that may reduce double taxation.

How SARS Handles Apportionment of Foreign Employment Income

A common misconception is that all income earned during the qualifying period is exempt. In reality, SARS requires that income be apportioned based on actual workdays spent rendering services outside South Africa.

Example 1 – Apportioning Foreign Employment Income

Consider an employee, Z, who works for a South African-based company but spends several months working in New Zealand. From May 2, 2020, to December 19, 2020, Z earns R1.5 million. However, Z also returns to South Africa periodically for work-related reasons. During this time, Z:

• Spends 161 days on workdays (excluding weekends) of which 136 are spent abroad and 25 in South Africa.

Here’s how SARS calculates the exempt portion:

136/161 × R1 500 000 = R1 267 081

With the R1.25 million cap in place, only R1.25 million is exempt, and the remaining R250,000 will be subject to tax in South Africa.

Documentation Required to Support Foreign Employment Exemption Claims

To claim the exemption, employees must maintain detailed records of their time spent working outside of South Africa. SARS may request documents such as:

• Employment contracts specifying the location of services,

• Travel itineraries or schedules,

• Passports showing entry and exit stamps, and

• Letters of secondment confirming the duration and nature of foreign assignments.

Documentation is essential, especially for those who travel frequently between South Africa and foreign locations, to substantiate time spent abroad and avoid issues with SARS during verifications and audits.

Foreign Tax Credits for Double Taxation Relief

For foreign employment income that exceeds the R1.25 million exemption limit, a double tax situation may arise if both South Africa and the foreign country impose taxes on the same income. Section 6quat of the Income Tax Act allows for tax credits to reduce double taxation under certain conditions. To claim the foreign tax credit, the employee must:

1. File an annual income tax return with SARS,

2. Submit proof of foreign taxes paid, and

3. Meet the requirements for the tax credit to be applied against South African tax liability.

Where a tax treaty exists, it may grant sole taxing rights to the foreign country, which could reduce the need for a foreign tax credit in South Africa.

Example 2 – Continuous Employment and Foreign Services

Consider CE, a South African resident employed by a South African company who is required to travel extensively within Africa. CE works in Angola from March 1 to April 25, Namibia from April 26 to May 15, and Mozambique from July 1 to August 6. In total, CE spends over 183 days abroad, with at least one continuous period of 60 days.

In this scenario, CE’s remuneration for the periods spent outside South Africa qualifies for the exemption, regardless whether it was in mutiple countries or only in one. If CE earned R1,450,000 for this period, the portion of income directly attributable to the foreign service is calculated using the same apportionment method, allowing only R1.25 million to be tax-exempt.

Key Takeaways for South African Taxpayers Working Abroad

The foreign employment income exemption offers valuable tax relief, but recent caps and complex qualifying requirements require taxpayers to be diligent. Here are essential points to keep in mind:

1. Track Time Spent Abroad: Only individuals meeting the 183-day and 60-day continuous absence requirement qualify. Maintain detailed travel records to substantiate claims.

2. Carefully Apportion Income: Not all income earned abroad is automatically exempt. SARS requires apportionment based on actual workdays spent abroad.

3. Understand the R1.25 Million Cap: The capped exemption may leave some foreign-earned income taxable in South Africa, particularly for high earners.

4. Leverage Foreign Tax Credits: Where foreign taxes are paid on income above the exemption threshold, consider applying for a foreign tax credit to reduce overall tax liability.

For high-earning South Africans working abroad, understanding and applying for the foreign employment income exemption and related credits can reduce their tax burden. While the exemption rules are detailed, diligent record-keeping, timely submissions, and a thorough understanding of SARS requirements will ensure that taxpayers make the most of the available relief on their foreign-earned income.

Conclusion

While this guide provides a foundational understanding of the SARS foreign employment income exemption, every taxpayer’s situation is unique. The best approach is still to consult with a qualified tax practitioner who can assess your specific case and provide tailored advice.

Complexities like tax treaties, apportionment, and potential double taxation relief are best handled by professionals who can navigate the nuances on your behalf. Connect with our expert team today to explore how we can help optimize your tax obligations.