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1.1 RESIDENCE
In the 2005 budget Manuel referred to the need to attract expatriates with scarce skills to South Africa and added that ?consideration is being given to changes to the definition of a ?resident? to allow for extended South African visitation for expatriates working temporarily in South Africa?. The period of exemption has now been extended from 3 (three) to 5 (five) years.
1.2 RESIDENCY TESTS
There are basically two tests to determine whether a person is a resident, namely firstly whether South Africa is their chosen place of normal residence, i.e. the place that a person habitually returns to and regards as home. Secondly if a person does not have such an intention, i.e. they are temporarily seconded to South Africa then one looks to the physical presence test. This specifies that persons become residents after being physically present in South Africa for more than 91 days during the sixth year of residence in South Africa and likewise for each of the five preceding years but that altogether during the five preceding years a person has been physically present, for not less than 915 days. If this requirement is met then that person becomes a resident as from the 1st day of the sixth year of assessment. Prior to March 2006, this period was three years and has been extended to five years as a result of Manuels “skills” endeavour.
1.3 PHASE IN
To phase-in the new five year rule, it will be applicable to any person who was already a resident by virtue of the physical presence test on the 28th February 2005 as a result of the old three year rule, (i.e. the 2005 year was the fourth year) with effect from the 2007 year of assessment. i.e. that will be the sixth year. However, for any individual who was not deemed to be a resident for tax purposes in terms of the physical presence test on the 28th February 2005, the five year rule is deemed to have come into operation from 1st March 2005 and, therefore, will apply in respect of these individuals from the 2006 year of assessment.
2. INCOME TAX CONSEQUENCES FOR FOREIGN EMPLOYEES
The first consequence is that any income received from employment in South Africa is subject to local taxation on the basis of source. This will be at normal marginal rates subject to the tax threshold of R40 000,00 for the 2007 year of assessment (under 65) or R65 000,00 (over 65). A foreign employee receiving employment income that exceeds the threshold is obliged to complete an income tax return. If the salary is paid into a foreign account by a foreign employer, then the employee will be taxable as a provisional taxpayer but otherwise the local company will be required to deduct tax on a PAYE basis. If the expatriate (“foreign employee”) is also subject to tax as a resident of another country, a double tax convention will generally provide the necessary credits resulting in the employee only being taxed in one of the two countries. The same position adheres in regard to director’s fees paid to such foreign employee by a local company.
2.1 ALLOWANCES AND FRINGE BENEFITS
Like any other local employee a foreign employee will be taxable on travel and subsistence allowances or such fringe benefits as are provided. Often this includes residential accommodation. The basic formula depending on the extent of the accommodation for calculating the monthly value of the fringe benefit is to take that person’s overall salary, to deduct R20 000,00 therefrom and use a factor of between 15% and 17% of the resulting total divided by the number of months the accommodation is occupied, i.e. take a salary of R500 000,00, the monthly taxable value would amount to R6 800,00! A recent case however has held that SARS is not entitled to tax an expatriate on rental value where he is temporarily seconded to SA under Section 9(7) of the Seventh Schedule (Case No: 11253).
2.2 USE OF COMPANY CAR
The same provisions apply as do to a local employee namely that if granted the use of a motor vehicle by an employer a monthly benefit valued at 2,5% of the determined value is calculated; the determined value being the original cost of the vehicle to the employer or where previously purchased the cost at that time less 15% per year until the employee has the use of it. The only tax efficient means of a company car today is where an employee keeps a logbook of business use for a private vehicle. At 2.5% per month the employee will be deemed to have received the full value of the car within three tax years which is a very expensive means of funding a motor vehicle!
2.3 RELOCATION COSTS
Payments by an employer to cover expenses such as the transfer of a foreign employee are exempt from tax in the employee’s hands and includes the expenses of transporting the foreign employee and members of his/her household and personal goods and possessions from the previous place of residence as well as the cost of renting temporary residential accommodation for not more than 183 days!
2.4 TAX DEDUCTIONS
While a foreign employee can deduct local pension fund contributions (limited to 7.5% of pensionable salary) or obtain deductions for retirement annuity fund contributions to local funds, limited to the greater of 15% of non-pensionable salary or R3 500,00, no deductions can be claimed from similar contributions to a foreign fund.
2.5 MEDICAL EXPENSES
These can likewise be deducted in terms of the normal formula (R500,00 or R1 000,00 with a spouse, per month) being contributions made to a local medical aid scheme or a foreign medical aid scheme provided it is registered under “provisions that are similar to those in the Medical Schemes Act……” Medical expenses not recoverable from a medical aid scheme whether incurred inside or outside South Africa can likewise be deducted but (for anyone under 65 years of age) can only be deducted to the extent they exceed 7.5% of taxable income.
2.6 INTEREST INCOME
Interest received by non-residents from a source within South Africa is not taxable but this is subject to the non-resident being physically absent from South Africa for at least 183 days during the tax year in question which may often not be the case in regard to a foreign employee.
2.7 DIVIDENDS
A non-resident or foreign employee is not subject to tax on dividends from local companies.
3. CAPITAL GAINS TAX
At present Capital Gains Tax is payable by non-residents on any immovable property in South Africa including any interest or right of any nature in immovable property. This would include shares in a company where 80% or more of the market value of its net asset value comprises immovable property and the non-resident holds 20% or more (directly or through connected persons) in the company. Of course immediately a foreign employee becomes a resident his assets on a worldwide basis become subject to CGT and it is this that the Minister is seeking to ameliorate. Self evidently no skilled foreign employee will wish to incur a tax of 10% on their assets outside South Africa for the privilege of having worked in South Africa for even the now extended five years plus 91 days!
4. CUSTOMS DUTY/VAT
There are various exemptions applicable to a foreign employee bringing in household effects or motor vehicles in regard to both VAT and customs duty. Provided the same goods are taken back no such duties will be payable albeit that insofar as household effects are concerned they can be disposed of locally after a period of six months and one motor vehicle may be imported into the Republic free of duty and exempt from VAT.
5. ESTATE DUTY
Estate Duty at the rate of 20% is only payable on the death of a non-resident to the extent that a non-resident has property whether immovable or otherwise actually in South Africa (less a deduction of R2.5m). Thus, if a foreign employee owns a house, Estate Duty will be levied on the house, its contents and the like or whatever else is physically in South Africa on death. This can be avoided by ensuring that all such assets are held by an offshore or local Trust. Many ex-South Africans returning after years abroad are under the mistaken impression that they will not be subject to Estate Duty in respect of assets purchased by them while they were non-resident, i.e. a London flat. The exemption only applies in respect of property acquired overseas before a person becomes a resident in the Republic for the first time. Thus, anyone born in the Republic and spending all but the last few years of their lives overseas but returning to reside in South Africa for those last few sun filled years will suffer Estate Duty on their worldwide assets. Again this can be avoided by creating a Trust and donating all overseas assets to such Trust before, or to the extent that such assets were purchased from monies earned from a foreign trade, then even after becoming a resident in South Africa.
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