With the South African 2021 filing season in full swing, we are waiting to see how SARS approaches the exemption for foreign services posts the 1 March 2021 legislative changes.
As you will recall, this change in legislation was hotly contested from the time the first draft proposal was announced back in 2017. Prior to this change, South African nationals working abroad were able to claim an exemption for their total remuneration for services rendered abroad, subject to specific requirements, in particular around their time spent outside SA. As of 1 March 2021, the exemption was amended to limit the exempt amount to R1,25M.
While it could be argued that this is a reasonable amount to exempt, when one considers that most South Africans are working in locations with strong currencies, once converted to ZAR this cap is easily reached. Furthermore, the concept of remuneration is extremely wide, including non-cash benefits, performance bonuses, and share gains. Once all these factors are considered, this cap is not very generous at all.
However, not all is lost! Oftentimes employers lose sight that the tax legislation does still have a few structuring opportunities up its sleeves.
One to consider is the provision of housing benefits while abroad. This exemption should not be confused with its “inbound” counterpart where an employee can be provided with accommodation in South Africa free of tax. The latter is subject to a period and rental value limitation (two years and R25 000 per month respectively), whereas the provision of accommodation to a person who is away from their usual place of residence in South Africa for work purposes is uncapped. Thus a big potential benefit!
Another structuring opportunity to consider is the subsistence or daily allowance. SARS has been very clear that a subsistence allowance is not to be used as a structuring tool and must be paid over and above an employee’s base pay. However, when evaluating the nature of a substance allowance and what this payment is intended to compensate for, i.e. living expenses, it could be argued that such a payment is, in nature, the same as a cost of living or location allowance. Both of which are common elements of an outbound employees’ compensation package.
A third and perhaps less obvious consideration is to explore the retirement options within your organisation and where possible allow outbound employees to belong to an offshore retirement plan. Company contributions to offshore plans are not considered a taxable fringe benefit and depending on the employee’s status on retirement may well also qualify for tax relief. Thus, this not only has short term but also long-term benefits.
So still good scope for employers to tax optimise by structuring carefully. Contact us to discuss how this could help you.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.