Do you need to pay tax on foreign income?

It’s a common misunderstanding that if a South African Resident is living and working overseas, they do not have to pay any South African Income Tax on their earnings.

Although some overseas income may be exempt in terms of the Income Tax Act, it must be remembered that if you are classified as a South African resident you will be liable for tax on your overseas income. South Africa has a residence-based tax system, which means residents are taxed on their worldwide income, irrespective of where that income was earned – with certain exclusions permitted. Non-residents will pay tax on the income earned from a South African source.

The ordinary residence test considers various factors to establish the country that would most accurately be described as the person’s real home. The physical presence test looks solely at the number of days spent in South Africa over the previous five years. A person will be regarded as a South African resident when they meet all the following criteria regarding the number of days spent in South Africa:

  • 92 days in total during the year of assessment under consideration;
  • 92 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
  • 916 days in total during those five preceding years of assessment.

In many countries double taxation agreements are in place. These agreements were entered to encourage international trade flow between South Africa and other countries, but also to prevent double taxation of a South African resident that can incur.

You might already be taxed in the originating country, in which instance you can apply for a directive from SARS to claim the tax back that was already deducted before you received the income. This will prevent the double taxation where you receive income from an international source.

By not registering for Income Tax in South Africa you would be avoiding tax, which is a criminal offence. This could carry fines or imprisonment should it become known to SARS. New international regulations, known as the Foreign Account Tax Compliance Act and the Common Reporting Standard, were implemented, which introduced notable changes in government efforts to improve global tax compliance. More than 96 countries, South Africa included, agreed to the automatic exchange of information. This allows the individual tax authorities of the different countries to obtain clearer information on their residents’ assets abroad and income received from foreign sources.

With the new legislation in place, avoiding tax would be more difficult and if attempted, could have significant consequences. It is always advisable to consult a tax professional or accredited financial advisor to ensure your tax affairs are managed correctly.

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