Tax in South Africa

As the tax status of South African residents and non-residents may differ, it is important for an employee to determine his/her status. Two separate tests are applied to determine whether or not a person is a resident of South Africa, i.e. the “ordinarily resident” test and “physical presence” test.

Ordinarily resident test

This is usually the first test to determine whether the individual is a resident of South Africa. The main aspect in this regard is to determine if a person’s permanent home, to which he/she will normally return, is in South Africa. If so, the individual will be a resident.

Physical presence test

This test is time-based and is only applicable to an individual who has not been considered ordinarily resident during the relevant year of assessment in South Africa. It takes the form of a “physical presence” test. The “physical presence” test must be done annually in order to determine whether the individual concerned is a resident for the year of assessment under consideration. The tests consist of three requirements, i.e. the person must be physically present in South Africa for a period or periods exceeding:

• 91 days in aggregate during the year of assessment under consideration;
• 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
• 915 days in the aggregate during the five years of assessment.

In terms of the “physical presence” test, a natural person, who is not ordinarily resident in South Africa, only becomes a South African resident for tax purposes in the fourth year of assessment if he/she is physically present in South Africa for the periods as set out above.

Income received from employment

Persons who are not South African residents are subject to South African income tax on their income that is derived from a source within or deemed to be within South Africa. Non-residents pay income tax at the same rate as residents and are generally entitled to the same deductions and rebates as residents. It is internationally accepted that the income from employment should be taxed in the country where the services are actually rendered, irrespective of the place where the contract is entered into or where the remuneration is paid.

The tax position of a foreign employee may, however, be affected by an agreement for the avoidance of double taxation between South Africa and the government of the foreign country in which the foreign employee resides. The precise terms of these agreements may vary from country to country and it is, therefore, not possible to give details of each DTA here.

Do all foreign employees have to complete income tax returns?

A foreign employee who receives employment income that exceeds a specified annual equivalent (R60,000 per annum or the equivalent thereof for the 2006 year of assessment) must complete an income tax return. In cases where a foreign employee receives employment income and other income from a South African source (for example interest in excess of the employment limits or rental income) an income tax return must be completed by a foreign employee, irrespective of whether employment income or the equivalent thereof exceeds R60,000 or not.

Capital gains tax

Capital Gains Tax (“CGT”) was introduced into the SA tax system with effect from 1st October 2001. From 1 October 2001 individuals must include 25% of any taxable capital gains in income and thus taxpayers who are subject to tax at the 40% marginal rate are taxed at an effective rate of 10% on such capital gains. Individuals who are resident in SA will be subject to CGT on their worldwide gains. Non-SA residents will be subject to CGT on the gains arising from the sale of immovable property situated in SA and certain assets held by an SA branch.

When a non-SA tax resident becomes a resident for SA tax purposes, they are deemed to have acquired their worldwide assets on the day they become a resident. A valuation would need to be performed of their worldwide assets on this date.

Exchange control

Foreign nationals who wish to live in South Africa and obtain permanent residence are treated as immigrants. In terms of the SARB’s exchange control manual, a person who immigrates to South Africa is not required to remit their foreign assets and/or foreign income to South Africa. However, should an immigrant wish to do so, he is required to declare such foreign assets on arrival, and complete the necessary documentation. Such assets/income introduced may be remitted out of South Africa again at any stage in the future (the Rand value at the time of entry to South Africa may be remitted).

Should the immigrant wish to depart from South Africa within 5 years of the date of immigration, the assets and cash previously transferred from the foreign country, together with any further South African assets or cash may also be remitted offshore. However, once such immigrant has been in South Africa for a period of five years, the only assets and cash that may be remitted offshore are those that were originally imported into South Africa from abroad, and the individual will be subject to the same exchange control requirements as a South African permanent resident (i.e. he will be entitled to a one-off offshore investment allowance of R 2 000 000, and a travelling allowance of R 160 000 per adult and R 50 000 per child in respect of each calendar year). Legitimate assets or income derived therefrom and held offshore, is not currently required to be brought into South Africa.

Contact the Tax Consultant, Fanus Jonck at tax@jonck.net for your tax queries.