EXEMPTION FROM INCOME TAX: FOREIGN EMPLOYMENT INCOME
South Africa’s change from a source basis of taxation to a residence basis of taxation resulted in the worldwide income of South African residents being subject to income tax in South Africa. The residence basis of taxation adopted in South Africa is based on the so-called “residence minus” system, which means that taxpayers will be taxed on their worldwide income but certain categories of income arising from activities undertaken outside the Republic will be exempt from South African tax.
The residence basis of taxation is applicable to years of assessment commencing on or after 1 January 2001. Since the year of assessment of a natural person commences on 1 March, natural persons will only be affected by the residence basis of taxation with effect from 1 March 2001.
In line with international best practice, remuneration derived from services rendered outside South Africa under certain circumstances is exempt from South African tax under section 10(1)(o)(ii) of the Act.
The Law
Section 10(1)(o)(ii) of the Act exempts from income tax:
“any remuneration as defined in paragraph 1 of the Fourth Schedule
(i) …
(ii) received by or accrued to any person during any year of assessment in respect of services rendered outside the Republic by that person for or on behalf of any employer, if that person was outside the Republic-
(aa) for a period or periods exceeding 183 full days in aggregate during any 12 months period commencing or ending during that year of assessment; and
(bb) for a continuous period exceeding 60 full days during that period of 12 months, and those services were rendered during that period or periods:
Provided that-
(A) for purposes of this subparagraph, a person who is in transit through the Republic between two places outside the Republic and who does not formally enter the Republic through a port of entry as defined in the Immigration Act,
2002 (Act No. 13 of 2002), shall be deemed to be outside the Republic; and
(B) the provisions of this subparagraph shall not apply in respect of any remuneration derived in respect of the holding of any office or from services rendered for or on behalf of any employer, as contemplated in section 9(1)(e)”
General Observation
Although the entire 183 day (or more) period of absence from the Republic need not be continuous, the 60 day period must be continuous.
Weekends, public holidays, vacation and sick leave spent outside the Republic are considered to be part of the days during which services were rendered during the 183 day and 60 day periods of absence.
The person’s absence must have been to render services for or on behalf of his or her employer in terms of an employment contract, which means that the exemption will not apply to self-employed persons or independent contractors.
The taxability of remuneration earned before the commencement of years of assessment commencing on or after 1 January 2001 (in practice, remuneration earned by natural persons before 6 1 March 2001) should be determined in terms of the legislation applicable prior to the introduction of the residence basis of taxation.
If called upon, taxpayers will have to submit some form of documentation to confirm their absence from the Republic. This documentation may include secondment letters, employment on tracts from foreign countries, and copies of passports. This documentary proof will assist in the verification of the period or periods worked outside the Republic.
Where a person who has already complied with the exemption requirements of section 10(1)(o)(ii) in a year of assessment, spends vacation leave or sick leave in South Africa during the same year of assessment, the remuneration received by the person during the period of leave will continue to be exempt from tax in terms of section 10(1)(o)(ii) to the extent that the remuneration is attributable to the number of vacation or sick leave days credited to the employee in respect of and during the period of service outside South Africa under a vacation or sick leave scheme operated by the employer that is similar to vacation or sick leave schemes that generally prevails in the South African business community for persons employed in South Africa.
The potential for an exemption under section 10(1)(o)(ii) of the Act does not automatically waive the liability of an employer to deduct employees’ tax in terms of the Fourth Schedule to the Act. An employer that is satisfied that the provisions of section 10(1)(o)(ii) will apply in a particular case may, however, elect not to deduct employees’ tax in a particular case. Where it is found that the exemption was not applicable the employer would be held liable for the employees’ tax not deducted as well as the concomitant interest and penalties.
An exemption under the provisions of section 10(1)(o)(ii) does not mean that an employer or an employee is absolved from liabilities under the Unemployment Insurance Contributions Act or the Skills Development Levy Act. These two Acts do not provide for the same exemption.
EXAMPLE
Ms. A was seconded by a South African holding company to a subsidiary in Australia for the period 1 March 2001 to 30 September 2001 (7 months). An employment contract was entered into in which it was clear that she would be remunerated by the South African holding company and that she would not, under any circumstances, return to South Africa during the period of the secondment.
Questions and Answers:
a) Will she be entitled to the section 10(1)(o) exemption?
If the conditions of the employment contract are met she would have rendered services outside South Africa for a continuous period of 214 days. When the filtering process of the flow diagram in Annexure A is followed, it is clear that she will be entitled to the exemption in terms of section 10(1)(o).
b) Is the employer allowed not to deduct PAYE?
An employer that is satisfied that the provisions of section 10(1)(o)(ii) will apply in a particular case may elect not to deduct employees’ tax in a particular case. Where it is later found that the exemption was not applicable the employer would be held liable for the employees’ tax not deducted as well as the concomitant interest and penalties.
c) What happens in the tax assessment of the employee?
The income from the secondment will still be shown under the relevant code on the IRP 5 certificate of the employee and must be
declared in the relevant section of the employee’s income tax return that deals with income considered not to be taxable. Proof like a
passport and an employment contract may be requested from the employee to support the exemption.
SUBSISTANCE ALLOWANCE
If an employee is obliged to spend at least one night away from his usual residence in South Africa on business, the employer may pay an allowance for personal subsistence and incidental costs without such amounts being
included in the employee’s taxable income, subject to the employee travelling for business by no later than the end of the following month.
If such allowance is paid to an employee and that employee does not travel for business purposes by the end of the following month, the allowance becomes subject to PAYE in that month. If the allowances do not exceed the amounts or periods detailed below, the total allowance must be reflected under code 3714 on the IRP5 certificate. Where the allowances exceed the amounts or periods detailed below, the total allowance must be reflected under code 3704 (local) or 3715 (foreign) on the IRP5 certificate. The following amounts are deemed to have been expended
by an employee in respect of a subsistence allowance:
Local travel
• R98 (2013 : R93) per day or part of a day for incidental costs; or
• R319 (2013 : R303) per day or part of a day for meals and incidental
costs.
Where an allowance is paid to an employee to cover the cost of accommodation, meals and incidental costs, the employee has to prove how much was spent while away on business, which is limited to the allowance received.
Overseas travel
Actual accommodation costs plus an allowance per country as set out in the Government Gazette per day for meals and incidental costs incurred outside South Africa. The deemed expenditure is not applicable where the absence is for a continuous period in excess of six weeks.
Fixed Travel Allowances
As from 1 March 2010, 80% of the fixed travel allowance is subject to PAYE. As from 1 March 2011, where the employer is satisfied that at least 80% of the use of the vehicle for the year of assessment will be for business purposes, the inclusion rate may be limited to 20%. The full allowance is disclosed on the employee’s IRP5 certificate, irrespective of the percentage of business travel.
Re-imbursive Travel Expenses
Where an employee receives a reimbursement based on the actual business kilometres travelled, no other compensation is paid to the employee and the cost is calculated in accordance with the prescribed rate of 324 cents (2013 : 316 cents) per kilometre, no PAYE is deductible, provided the business travel does not exceed 8 000 kilometres per year. The reimbursement must be disclosed under code 3703 on the IRP5 certificate. No PAYE is withheld and the amount is not subject to taxation on assessment. If the business kilometres travelled exceed 8 000 kilometres per year, or if the reimbursive rate per kilometre exceeds the prescribed rate, or if other
compensation is paid to the employee the allowance must be disclosed separately under code 3702 on the IRP5 certificate. As from 1 March 2013, PAYE is withheld on a payment basis.
Accurate records of the opening and closing odometer readings must be maintained in all circumstances. As from 1 March 2010, the claim must be based on the actual distance travelled as supported by a log book and the deemed kilometres method may no longer be used. The deduction in respect of business travel is limited to the allowance granted and may be determined according to actual expenditure incurred or on a deemed cost per kilometre basis in terms of the table below. The cost of the vehicle includes VAT but excludes finance costs. Where actual expenditure is used the value of the vehicle is limited to R480 000 (2011 : R400 000) for
purposes of calculating wear and tear, which must be spread over seven years.
The finance costs are also limited to a debt of R480 000 (2011 : R400 000). In the case of a leased vehicle, the instalments in any year of assessment may not exceed the fixed cost component in the table.