Government increases tax-free cap on foreign income

The concept of emigration is to be replaced by a verification process.
- Amanda Visser

Tito Mboweni

Finance Minister

South Africans who are working and living abroad have been given some relief with a slight increase in the tax-free cap on their foreign earnings.

National Treasury introduced a R1 million limit on the tax-free amount that South African tax residents can earn abroad. This limit has now been lifted to R1.25 million. The change is effective from next month.

South Africans who have been living abroad for many years have increasingly opted to emigrate or to break their ties with the country in an effort to avoid paying more tax in SA.

Finance Minister Tito Mboweni said in his budget speech that government wants to encourage South Africans abroad to keep their ties with the country.

He also announced that it will be phasing out the “administratively burdensome” process of emigration through the South Africa Reserve Bank.

The concept of emigration is to be replaced by a verification process. Tax residency for individuals will continue to be determined by the ordinarily resident and physically present tests as set out in the Income ax Act.

SA is one of several countries who committed to sharing taxpayer information with regards to their bank accounts and investments. In this way the South African Revenue Service (Sars) will be able to get access to information relating to South African tax residents’ income outside of the country to ensure that they pay “the appropriate level of tax”.

In the 2020 Budget Review government proposes to remove the exchange control treatment for individuals, while strengthening the tax treatment.

“The intention is to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with the South African Revenue Service.”

Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. The focus will be on the source of the fund and the transfers will trigger a risk management test that will include certification of the individual’s tax status.
There must also be the assurance that the individual complies with anti-money laundering and countering terror financing requirements. This will be phased in by March 1, 2021.

Restrictions on emigrants – such as the restrictions on them being allowed to invest, and the requirement to only operate blocked accounts, to have bank accounts and borrow in South Africa – have been repealed.