Tax relief for services outside South Africa
26 March 2013
Posted by: Author: Doria Cucciolillo
Source: Doria Cucciolillo
The Income Tax system in South Africa is residence based. This means that South African residents will be subject to normal income tax in South Africa on income derived from world-wide sources.
An amount is included in a resident’s gross income if it complies with all the components of the "gross income-definition” which is set out in section 1 of the Income Tax Act, or if it is specifically included as such. When a resident receives remuneration for services rendered outside South Africa, the amount will normally constitute gross income. As a result, the amount will be subject to income tax in South Africa.
A resident may also be taxed on this income in the foreign country where the services was rendered, depending on the provisions of the double taxation agreement between South Africa and the specific country.
Let us look, for example, at the situation where a South African resident renders services in Australia in terms of an employment contract. According to the double taxation agreement between South Africa and Australia, the resident will solely be taxed in South Africa if all of the following conditions are met:
The employee must be physically present in Australia for a period that does not exceed 183 days in any 12 month period.
The employer may not be a resident of Australia.
The employer or any permanent establishment that he or she owns may not be entitled to an income tax deduction in Australia for the remuneration expenses incurred.
From the above it is evident that an employee will be taxed in Australia on the remuneration earned if he or she is, for instance, physically present in Australia for more than 183 days during a 12 month period. The amount will also be taxed in South Africa since a resident is taxed on his world-wide income. In this situation, it appears that the amount will be subject to normal income tax in both countries.
However, in order to prevent double taxation in the above mentioned situation, the employee may qualify for an exemption for South African income tax purposes if all the necessary requirements are met.
Firstly, the exemption will only apply if income in the form of "remuneration”, as defined in paragraph 1 of the Fourth Schedule, is received or had accrued. Therefore the exemption will be available only if a salary or any similar income (that arises from employment) was received or had accrued to the resident.
The resident must be physically outside South Africa for a period exceeding 183 full days during a 12 month period which must include a continuous period of 60 full days. It is required that the services must be rendered during this period.
The Act does not state that the services must be rendered during the whole period of absence. Therefore a person may still be entitled to the exemption if services were rendered during a part of the period of absence although the other part may have been utilised for other purposes, like a vacation. A person is also allowed to stay in the foreign country (before or after services were rendered) with the sole purpose to comply with the 183 days-rule. Although it may be done only to qualify for the exemption, the latter will still apply if services were rendered within the period of absence from South Africa.
Furthermore the Act only refers to "absence” and no indication is made that the person must be present in only one foreign country for the entire period. As long as the person is absent from South Africa and does not return for a continuous period of 60 full days, the exemption will be granted. If, for instance, an employee rendered services in Australia and he stayed there for 140 full days (which includes a continues period of 60 days) before he returned to South Africa, he must return to any other foreign country (or countries) for a minimum period of 44 full days (within the same 12 month period) in order to qualify for this exemption.
When determining whether a person complied with the above requirements, the following applies:
A "full day” refers to a total period of twenty-four hours; from 0h00 AM to 0h00 PM.
"Months” refer to full calendar months. The twelve-month period does not refer to the person’s year of assessment and may include any continuous period of twelve calendar months.
The last requirement states that the services must be rendered for (or on behalf) of an employer who is situated in or outside South Africa. It is clear that the exemption will not apply if a person is self-employed and he receives income for services carried out in the foreign country.
It must be noted that this exemption will not apply if services were rendered on behalf of the South African government or if the employee was appointed to a public office through South African legislation or Parliament. In this event the full foreign income will be subject to tax.
When services are rendered during a twelve month period which extends over more than one year of assessment, the inclusion in gross income must be apportioned evenly over those periods. The exemption may be utilised accordingly and is already available in the first period in which income is included in the person’s gross income. Therefore, the exemption may be utilised irrespective of the fact that the requirements may only be complied within the following year of assessment.
From the above it is clear that when a South African resident performs services in a foreign country as a result of his (or her) employment, the above mentioned requirements need to be considered to determine whether the exemption will apply. A taxpayer can easily make the mistake to, for instance, unnecessarily return to South Africa on a regular basis. As a result the exemption will be forfeited if the taxpayer does not stay in the foreign country for a continuous period of 60 full days.
In conclusion, the above mentioned scenario stresses the importance of tax planning. A person can certainly save an enormous amount of tax if he or she utilises the concessions available in terms of tax legislation.