Exempt foreign income
Exempt foreign income – Section 10(1)(o)(ii)
This article is written by a tax practitioner that specialises in individual tax and therefore has extensive experience in all tax matters.
This article will focus more on a situation where a taxpayer is sent abroad by a South African company and the company taxed the income in South Africa and the person qualifies to have the income exempted from taxable income in South Africa. In other words, income which is exempt has been taxed. Most people ask the question, why did my company not exempt my income and rather than pay the money over to SARS, pay it over to me as I will qualify for the exemption? (So then no PAYE s paid to SARS) The answer is simple! The company cannot force an employee to comply with the requirements to have income exempted and this can lead to high amounts to be paid back to SARS by the employee. (Or other complications are possible and then the employee does not collect the benefit and owes SARS a large amount) Then there is the chance that the employer could be held accountable for not paying SARS their dues and to avoid this, the amount is taxed and left for the taxpayer to get the income exempted with SARS. From experience, many taxpayers do not understand all of the requirements and therefore miss the compliance with this section.
Check to see if you qualify to have your income exempted.
You would have had to comply with the basic below requirements:
- Have you been out of the country for MORE than 183 days in ANY 12 month period?
- During the above period, have you been out of South Africa for more than 60 days consecutively?
- Can you show which income on your IRP5 should be exempted (if you have met the above criteria, this step could be easily resolved but needs to be done before lodging an objection.)
- Do you have all of the documentary proof (Such as copies of passports, table of days in and out of the country, etc).
If you can say ”yes” to all of the above questions, your income or a portion of your income should be exempted by SARS.
The next step – Many people do not know this yet but SARS has rules on objections (old rules and new rules) and these rules have been updated and gazetted during July 2014 and any objection done with SARS, should be done within those rules. Therefore, you have to have a deep understanding of the exempt income rules as well as the objection rules when attempting to have income exempted. These type of cases, Section 10(1)(o)(ii) , can usually lead to large refunds and therefore many complications when objections are not done properly. (For objections – Tax administration act Section 103 to 107) (Read more on objections on our website as we can only deal with 1 concept per article but are just pointing out that taxpayers applying for this need to understand the objections rules.)
Things to keep in mind:
- The law allows for any 12 month period. This means that you can start anywhere in South Africa’s tax year and that the 12 month period does not have to coincide with the tax year.
- Your 12 month period can start from the day you leave or backwards for a period of 12 months when the taxpayer came back to South Africa
- Where the 12 month period overlaps with the tax year, a taxpayer may have to do an objection for the first tax year and again the next tax year.
- Example, say the taxpayer left SA 1 July 2014 and came back 31 August 2015. A 12 month period could be counted from 1 July 2014 onwards or from 31 August 2015 backwards. Either way, there will be an extra month. It is your choice which would be the best, going forward or backwards.
- Further on the above, income between 1 March 2014 to end of June will be taxable by SARS but income for the rest of the tax year (from 1 July 2014 – 28 February 2015) should be exempted from taxable income. This example therefore does not mean no taxable income, just not taxable income for the full 12 months. (Since SARS taxes income on a scale or progressively, this would also lead to a higher refund as the taxpayer’s income would have been subjected to the full assumed PAYE tax rate between March – June but as the income is limited, or not a full year, the rate of tax is reduced and this too leads to a higher refund by SARS.
- An objection will have to be done for period July 2014 – February 2015 in the 2015 tax year
- The other income would have to be exempted between March 2015 – June 2015 will be exempted in the 2016 tax year by means of a 2nd
- Income received for the month of August 2015 will not be exempt and will be subject to SA tax as a second period of exemption was not achieved. (Another 12 month period will be required)
- The above therefore does not mean that the full amount of income is exempt when working out of SA but it is limited to a 12 month period unless a new 12 month period is started and the above criteria is met again.
These type of cases can become very complex and if you are not 100% sure of factors, it is important to rather let a specialist tax consultant in the field deal with this. (As doing this wrong could lead to not receiving the benefit at all)
Download a practice note from SARS in this regard.
If any of the matters are complicated, please feel free to contact us or leave a question on this page.