Most South Africans think the prospect of working and living in a foreign country is an exciting adventure.
However, the ins and outs of your tax affairs can be enough to make one less adventurous. The first thing to establish is what your “tax residency status” is.
This is easier said than done, because each country has its own set of rules to determine tax residency.
Hugo van Zyl, cross-border tax and exchange control adviser at Breytenbachs Cross-Border Advisory, says one of the most common errors people make is to assume that they will be taxed by the country of contract or from where payment is made.
One can actually end up paying tax in South Africa and the country that you have chosen to work and live in. Most countries of the world will insist or at least attempt to tax the salary or remuneration earned while in the country.
This is the so-called source rule of taxation allowing a tax jurisdiction to tax you where the services are rendered, ignoring the place of contract (employment) and the country from where the salary is paid. This may expose one to double taxation, paying tax where you provide your service and in South Africa, where you are tax resident.
Fortunately if South Africa has a double tax agreement with your new country, there can be some relief. Unfortunately it is not a simple matter to know which country will give tax relief and which one will walk away with the tax.
Beric Croome, tax executive at law firm ENSafrica and member of the South African Institute of Tax Professionals (SAIT) policy committee, says it is important to remember that South African tax residents are taxed on their worldwide income.
One can also be considered a tax resident in the new country. That is where the complication starts.
Croome says if the person is temporarily resident abroad and has not severed links with South Africa he or she remains a tax resident in South Africa. This effectively means the taxpayer will be liable for tax in South Africa on the income derived in the other country.
In countries like Australia and the UK you are at a risk of becoming a tax resident once you start working and living in the country, says Van Zyl.
Another issue to be mindful of is that there is a different set of rules for an employee and an independent contractor.
If the person is in an employer and employee relationship and receives a salary for services outside of South Africa there is a “counting days rule” that will exempt the salary from being taxed in South Africa. That is if the taxpayer complies with the rule, of course.
The counting rule means that if an employee is outside of South Africa for a period exceeding a total of 183 days during any 12 month period, and for a continuous period exceeding 60 full days during the same 12 months, then the salary earned during that period will not be taxed in South Africa.
For the independent contractor there is no exemption under the rule in the Income Tax Act. That person will be taxed in SA on the income earned abroad, says Croome.
Van Zyl explains if there is uncertainty or conflict about the tax status of the individual then one can rely on the treaty to see who has the taxing rights.
If Malaysia, for example, considers an individual to be a tax resident on a worldwide base the treaty can be applied so that the individual is a Malaysia tax resident as opposed to a South African tax resident.
If there is no permanent home available in South Africa, and the permanent home is in Malaysia then Malaysia has the right to tax the worldwide income, and not only the salary earned in Malaysia, says Van Zyl.
SAIT deputy CEO Keith Engel warns that if a taxpayer abroad obtains treaty relief to be a foreign tax resident, the shift in tax residence will trigger a capital gains tax for all assets (except for real estate and certain business assets).
“This can happen relatively easily. This not something new, but a possible trap for the unwary,” says Engel.
The issue is complex and a potential minefield if one starts making assumptions. Croome warns that the tax consequences depend on the circumstances of the individual, as well as the country in which the person works.