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South Africa’s move to blockade level 1, including the opening of international borders, will have been a great relief to many in the country.
Although life has by no means returned to normal, this development begins to again create possibilities for international travel and tourism.
Also, from a tax perspective, it could provide some relief regarding numerous tax problems caused by the lockdown, says the Bowmans law firm.
“While some people were allowed in and out of South Africa, they were the exception rather than the rule,” the firm said.
“For the rest of this group, the travel ban for more than six months not only affected their ability to earn income, but also had negative tax implications for both individuals and potentially businesses as well.”
Foreign income exemption
“A large number of South Africans make their living abroad. While many of them return home on a regular basis, they generally spend enough time abroad to qualify for the foreign income exemption under section 10 (1) (or) (ii) of the Income Tax Act (ITA). ).
“When the shutdown was originally announced in March 2020, they had to decide whether they would go home for the shutdown or whether to stay abroad,” Bowmans said.
In terms of the foreign income exemption, remuneration earned for services rendered will be exempt if the South African tax resident was working abroad for more than 183 days during any 12-month period and for a continuous period of more than 60 days during that 12 month period. period of the month.
Due to a recent amendment, the exemption applies up to a maximum amount of R1.25 million per year. People who continued to work abroad during this period should have no problem qualifying for the foreign income exemption.
However, people who returned to South Africa during the lockdown period, either had no income during this period, or likely would not have been able to meet the requirements of section 10 (1) (o) (ii), Bowmans said. .
“When considering the possible application of section 10 (1) (o) (ii), it is important to note that the ‘day count’ in the section refers to ‘any period’ of 12 months, not a year calendar or a fiscal year.
“In the normal course, these 12-month periods would run consecutively. However, this is not a requirement of the section and therefore it should be possible to start a new 12-month period once the person starts working abroad again, ”said Bowmans.
Employees who were not paid during the lockdown period would not need to rely on the foreign earnings exemption for the lockdown period, but can start a new 12-month period once they start working abroad again, the firm said.
“However, when a person continued to work for a foreign employer, but did so remotely from South Africa, it is highly unlikely that they will be able to rely on the foreign income exemption for earned income.
“While this may be possible, it will depend on how long you spend outside of South Africa before and after the shutdown, and when your specific 12-month cycle begins.”
With the end of the travel ban in sight, and with no indication that the rules regarding the foreign income exemption will be relaxed, it is important for both individuals and South African employers whose employees may be dependent on the foreign income exemption carefully assess their current positions and how the prospect of travel in the near future might bring some relief, the firm said.
Tax residence – people
A non-resident could become a tax resident in South Africa by becoming a habitual resident, or in terms of the physical presence test, Bowmans said.
Ordinary residency is based on the subjective intention of the taxpayer, but the physical presence test is an objective test based on the number of days spent in South Africa over a six-year period.
A non-resident could become a tax resident in terms of this test:
- If they are present in South Africa for more than 91 days in total during the current fiscal year;
- If they were physically present in South Africa for more than 91 days in each of the previous five years; Y
- If they were physically present in South Africa for a total period of more than 915 days during the previous five fiscal years.
However, this is subject to a person not being a resident of South Africa if they are considered to be exclusively a resident of another state in terms of a DTA, Bowmans said.
“Non-residents who have not been able to leave South Africa since March may be concerned about becoming tax residents as a result of the closure rules.
“As ordinary residence is based on the intention of the taxpayer, and depending on an individual’s personal circumstances, it should be possible for a person not to become a habitual resident in South Africa, even if they were unable to leave South Africa due to the prohibition of travel “.
However, what is the position with respect to an individual in their sixth year of the physical presence test, who had to spend more than 91 days in South Africa due to the travel ban?
“As the physical presence test does not take into account the intention of the parties or any special circumstances, the number of days spent in South Africa cannot be ignored, even if it was due to circumstances beyond the control of the individual, Bowmans said.
“That said, if the individual is a tax resident in a country that has entered into a DTA with South Africa, and if that DTA considers the individual to be an exclusive resident of the other jurisdiction, the individual would not become a tax resident in South Africa.”
Non-residents who had to remain in South Africa during the lockdown should carefully assess their current positions and should consider how lifting the travel ban could be used to their advantage in the context of applying residency tests, the firm said.
Comment from Esther Geldenhuys (Senior Associate) and Aneria Bouwer (Partner) of the Bowmans Law Firm.
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