National Treasury believes that the 183 day threshold for South Africans working outside the country should remain in the proposed amendments to the tax laws.
National Treasury is in the process of repealing tax exemption laws on income earned by South Africans working overseas through two bills, the 2017 Taxation Laws Amendment Bill and the 2017 Draft Tax Administration Laws Amendment Bill.
If planned new legislation goes through Parliament, South Africans who work overseas could be taxed locally for foreign earnings from March 1 2020.
Following a public comment process, Treasury said the proposal will be changed to allow the first R1m of foreign remuneration to be exempt from tax in South Africa if the individual is outside of the country for more than 183 days as well as for a continuous period of longer than 60 days during a 12 month period. It revealed these changes at parliament’s standing committee on finance last week.
In response to these changes, PwC’s tax policy leader Kyle Mandy said he believed the minimum days should be increased to 325 to prevent individuals from abusing the law.
On Wednesday, Mandy said that one of the concerns Treasury had when PwC engaged with them was that the number of days spent outside the country were being manipulated by some individuals in order to take advantage of the exemption.
“The exemption does not require the employee to actually be providing services for the full 183 or 60 day periods,” he said.
“All that is required is that the person is outside the country for the required number of days in which case any foreign services remuneration will qualify for the exemption. “Staying out of the country for 183 days is relatively easy to manipulate where an individual is out of the country for an extended period of time,” he said.
One high-profile story involving a person benefiting from this was former Proteas captain Graeme Smith. Following his team’s early exit from the Cricket World Cup in 2011 in India, Smith got permission to visit his then girlfriend in Ireland, and then to return to India to play in the IPL.
Smith’s agent at the time, Craig Livingstone, told City Press: “Like any person who spends time outside the country, (Smith) becomes eligible for those tax benefits. Businessmen and other sportsmen are entitled to them, so why shouldn’t Graeme be?”
Mandy believes the manipulation of the law should be stopped. “If the requirements are a lot stricter – like making the minimum 325 days or even 250 days – it would make it hard for people to manipulate the exemption and would limit it to those it is intended to benefit, namely persons in long-term foreign employment.”
However, National Treasury said it was sticking with the 183 limit for now. Chris Axelson, director of personal income taxes and saving at National Treasury, told the press on Wednesday that increasing the days to 325 would impact expats that earned lower incomes.
Axelson explained that the proposal in the draft response document and the draft presentation kept the 183 day rule, where those out of the country for less than 183 days would be taxed in full on their employment income (as per the current law), while the first R1m in employment income for those outside of the country for more than 183 days would be exempt.
“Given the concerns of the MPs in the previous public hearing on 29 August relating to the impact on lower income earning South Africans overseas, it was felt that the 183 day rule should remain, but alongside a R1m threshold.
“Under the 325 day proposal, if there were teachers, nurses, security guards or others on lower incomes who worked on contracts overseas for less than 325 days, they would be significantly impacted as the R1m threshold would not apply to them.
“With a 325 day rule, those in high income tax countries would also need to most likely pay top up taxes to SARS if they did not exceed the 325 day threshold. For those reasons we proposed keeping the rule at 183 days, but with the new threshold,” he said.
However, Axelson said that the standing committee on finance could still suggest an amendment either before or after the bill is tabled in Parliament.
During this time, Mandy believes the days could be still increased. “I think it is possible that they will go back and acknowledge that the days should be increased,” he said.
“Treasury’s concern is that if they raise it, it will affect the lower income people who the R1m threshold is primarily aimed at,” he said. “They believe nurses and teachers will be negatively impacted by the increase in the number of days.
“I don’t agree with that as such professionals should have little difficulty in meeting a higher number of days requirements as they should be on contracts of at least a year in the vast majority of cases.”
Mandy said he wouldn’t be surprised if they do increase the days to about 250 days. “That would be appropriate,” he said.