Over the past few months, the taxation of foreign employment income earned by South African residents and the proposal by National Treasury (Treasury) to repeal the provision that exempted such income from the payment of tax, has drawn a lot of attention. Most recently, Treasury indicated that it would no longer propose a repeal of this provision, but would instead propose, among other things, that the first R1 million in foreign employment income received by or that accrues to a South African resident, should still be exempt.
Despite some people not being aware of it, an important issue to consider in this regard is the exchange control (Excon) laws that apply to such persons. In terms of the Exchange Control Regulations, 1961 (Regulations) read with the Currency and Exchanges Manual for Authorised Dealers (AD Manual), where a South African person who is a resident for Excon purposes works abroad, there are specific rules that apply. Section B.4(G) of the AD Manual, dealing with “residents temporarily abroad”, is of particular importance in this regard.
General provisions pertaining to residents temporarily abroad
Section B.4(G) sets out the manner in which a resident temporarily abroad may make use of their South African sourced funds abroad for purposes of subsistence and the requirements to be met by such persons where they wish to temporarily export certain personal effects and other assets.
Firstly, such persons may make use of their R1 million single discretionary allowance (SDA) and of the R10 million foreign investment allowance (FIA) per calendar year without returning to South Africa. The SDA comprises an amount of R1 million per calendar year, which any resident who is 18 years or older may use for any legal purpose abroad, without obtaining a tax clearance certificate. For example, the SDA may be used for investment purposes or to send gifts to persons abroad, but may not be used to export gold or jewellery. It should be noted that there are also other rules that apply to the use of the SDA. In order to make use of one’s FIA and transfer an additional amount of R10 million abroad in a calendar year, persons have to meet the requirements contained in sB.2(B) of the AD Manual, which states, among other things, that persons must have a tax clearance certificate issued by SARS.
Furthermore, residents temporarily abroad may use their local debit and/or credit cards within the SDA limit. However, it is important that persons do not exceed the R1 million limit permitted by the SDA or the R10 million limit, where persons have been granted permission to make use of their FIA. In other words, if persons transfer South African funds abroad by making use of their SDA and they use those funds for various purposes, including the purchase of goods with their credit or debit card, they must ensure that the total amount transferred abroad does not exceed R1 million, as this would constitute a contravention of the Regulations, read with the AD Manual.
Residents temporarily abroad may also receive pension and retirement annuities as mentioned in sB.3(A)(ii) of the AD Manual as well as monetary gifts and loans as mentioned in sB(4)(A)(x), which deals with the rules regarding the use of the SDA. However, no other foreign currency may be availed of without the specific prior written approval of the Financial Surveillance Department of the South African Reserve Bank (FinSurv).
From a procedural perspective, if persons make use of a general or special power of attorney to facilitate transfers in terms of their SDA or FIA, a certified copy of the person’s valid green barcoded identity document or Smart identity document card must accompany the power of attorney.
Other considerations – foreign earned income
Residents temporarily abroad should also take into account that where they earn income on approved foreign assets or in respect of services rendered to non-residents while physically abroad, such income constitutes foreign earned income in terms of sB.17(A) of the AD Manual. Such foreign earned income, which can take the form of a salary paid to the persons in foreign currency, may be used abroad without being declared to FinSurv and is not subject to the provisions of Regulation 6. These provisions state that persons must repatriate any foreign currency that they become entitled to, within 30 days of becoming entitled to such foreign currency. It is important to note that in the context of foreign employment income, the services must be rendered while the person is physically abroad. Where the person is physically in South Africa when rendering the services to the foreign employer, the remuneration received for such services would not constitute foreign earned income within the context of sB.17(A). If such remuneration is paid to the person in foreign currency, it must be repatriated to South Africa within 30 days in terms of Regulation 6. Failure to do so would mean that such remuneration constitutes an unauthorised asset and a person would most likely have to pay a levy to regularise such asset at a later stage.
It is also important to note that foreign earned income within the context of sB.17(A) of the AD Manual may not be disposed of to other South African residents, whether settlement takes place in rand or foreign currency, without the specific prior written approval of FinSurv. Such funds may also not be used to create a loop structure.
Any persons deciding to work abroad, should consider not only the tax implications of any foreign employment income received, but ensure that their use of foreign and South African sourced funds does not contravene South Africa’s Excon laws.