The tax implications of the amendment of section 10(1)(o)(ii) of the Income Tax Act 58 of 1962

Abstract

South Africa’s tax system changed from a source-based system to a residence-based system for years of assessment commencing from or after 1 January 2001. A residence-based system means that a resident would be subject to tax on worldwide income whereas a non-resident would only be subject to income earned from a source originating from the Republic of South Africa (“hereinafter referred to as the RSA”). Before 2001, the income tax exemption in terms of section 10(1)(o)(ii) of the Income Tax Act (hereinafter referred to as the “ITA”) was granted to officers and crew members employed abroad any RSA ship only. However, this exemption only applied if the officers and crew members were outside the RSA for more than 183 days during the year of assessment. A need arose for the scope of this exemption to expand when the RSA moved to a residence-based tax system in 2001, to include RSA tax residents who rendered services outside the RSA on behalf of an employer. Previously, section 10(1)(o)(ii) of the ITA provided for an exemption from normal tax for remuneration received by or accrued to a tax resident outside the RSA during a qualifying year of assessment. In this regard, remuneration included salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance, for services rendered. Furthermore, reimbursed allowances under section 8(1) of the ITA, amounts obtained under broad-based employee share plans under section 8B of the ITA and amounts received by directors or employees on the vesting of instruments under Section 8C of the ITA also qualified as remuneration. This research focuses on the amendment of section 10(1)(o)(ii) of the ITA that came into effect from 1 March 2020. In terms of the Amendment Act, RSA tax residents working abroad who qualifies for the section 10(1)(0)(ii) exemption will now be taxed in the RSA at the applicable income tax rate on all remuneration they earn as an employee in a foreign state exceeding R1.25 million. The research further focusses on the impact that the amendment currently have on RSA tax residents who are considering emigrating to work abroad, as well as on the tax system of the RSA. The findings from this research outlines the most important factors and impacts of the amendment. It outlines the options available for individuals who are considering moving abroad, such as financial emigration and reliance on double tax agreements. Furthermore, the research also provides a brief explanation on the tax relief available for tax residents who are taxed in more than one tax jurisdiction.