Foreign Employment Income: SARS Tax Exemption for South African Residents Working Abroad
There may be some good news for South African tax residents who work abroad, as you may qualify for tax exemptions on foreign employment income under Section 10(1)(o)(ii) of the Income Tax Act. This rule allows eligible employees to reduce their tax bill by exempting part of the income they earn overseas.
Recent changes from SARS, including a capped exemption limit, mean it's never been more important to understand who qualifies and how the exemption works. For many South Africans, this is a topic that can feel complicated. To help you better understand, we're explaining the foreign employment income exemption, outlining the eligibility requirements, and providing examples 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
There are several criteria taxpayers will need to meet to qualify for the foreign employment income exemption under Section 10(1)(o)(ii):
Residency and Employment Relationship:
Unfortunately, this exemption only applies to South African tax residents who are employed by a company. Self-employed individuals and independent contractors do not qualify, as the term “employee” is strictly defined. Only income earned through an employment relationship is eligible.
Directors and office holders generally do not qualify for the exemption on fees received in these roles.
Remuneration Requirements:
The exemption applies to earnings such as salary, leave pay, commission, and allowances for work performed outside South Africa.
Payments that aren’t linked to active employment, like severance packages or termination fees, do not qualify for the exemption.
Minimum Time Spent Outside South Africa:
To qualify, you need to spend more than 183 full days outside South Africa within any 12-month period, though these days don’t have to be consecutive.
Within this 12-month period, there must also be at least one continuous stretch of more than 60 full days abroad.
Exceptions:
These exemptions do not apply to 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 you earn R1.5 million from foreign employment, only R1.25 million may be exempt, while the remaining R250,000 will be taxed at the standard South African tax brackets. This cap means that high earners receive less tax relief than before, so it’s important to carefully calculate your tax liability and take any relevant tax treaties into account to reduce the risk of double taxation.
How SARS Handles Apportionment of Foreign Employment Income
A common misconception is that all income earned during the qualifying period is automatically exempt. In reality, SARS requires that only the income corresponding to the actual days worked outside South Africa is considered for exemption.
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 foreign employment income exemption, employees must keep detailed records of the time they spend working outside South Africa. These documents are something SARS may ask for, which include:
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.
Never underestimate the importance of documentation. This is especially important when you’re travelling between South Africa and various foreign locations, as it’s a good way to substantiate time spent abroad. This can help avoid issues with SARS during verifications and audits.
Foreign Tax Credits for Double Taxation Relief
As previously mentioned, if your foreign income exceeds the R1.25 million exemption limit, you could be subject to double taxation. This happens when both South Africa and the foreign country tax the same income, so it’s important to consider any available tax treaties or relief options. However, Section 6quat of the Income Tax Act allows for tax credits to reduce double taxation under certain conditions. To claim this foreign tax credit, you must:
File an annual income tax return with SARS,
Submit proof of foreign taxes paid, and
Meet the requirements for the tax credit to be applied against South African tax liability.
If there’s a tax treaty in place, the foreign country might have the main right to tax your income, which could mean you don’t need to claim 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
While the foreign employment income exemption can provide some tax relief, there are some requirements that you may need to keep in mind.Here are essential points to keep in mind:
Track Time Spent Abroad: Only individuals meeting the 183-day and 60-day continuous absence requirement qualify. Therefore, you need to maintain detailed travel records to substantiate claims.
Break Down Your Income:: Not all income earned abroad is automatically exempt. SARS requires apportionment based on actual workdays spent abroad.
Understand the R1.25 Million Cap: The capped exemption may leave some foreign-earned income taxable in South Africa, particularly for high earners.
Leverage Foreign Tax Credits: If you’ve paid tax on income above the exemption limit in another country, you can claim a foreign tax credit to lower your overall tax bill in South Africa.
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.
The Takeaway
While this guide gives you a solid overview of the SARS foreign employment income exemption, every situation is different. The smartest move is to speak to a qualified tax practitioner who can look at your specific circumstances and give advice that’s tailored to you.
Issues like tax treaties, apportioning income, and avoiding double taxation can get tricky, so having an expert guide you through the details can make all the difference.
Get in touch with Eqeight today to see how we can help you manage your tax obligations with confidence.
