The South African government has greenlighted a huge reform that will see the worldwide earnings of 800,000 expats liable for tax for the first time.
Finance Minister Tito Mboweni has confirmed the delayed abolition of the foreign employment income tax exemption will start from March 2020.
The new rules called the South African Expat Tax, make anyone classed as a South African resident earning ZAR1 million (US$69,400/GB£52,450 or AED255,000) liable to tax on their worldwide income charged at rates of up to 45%.
Under the rule change, salaries will include benefit packages of expats on assignment, such as the cash equivalent of housing, medical insurance, school fees and flights home.
Many expats in the Gulf States can also expect to pay tax on their previously tax-free end of contract gratuities.
Avoid knee-jerk reactions
They will also suffer from exchange rate losses as most companies pay expats on assignments in US dollars rather than other currencies.
Worries about how the tax change will impact their finances have led many expats to consider severing their ties with South Africa, but one tax expert cautions this may not be a suitable option.
Official data suggests out of 900,000 South African expats, only 103,000 can prove they are non-resident and not subject to the new tax.
“Financial emigration, however, does not automatically equate to non-residence,” said deVere Acuma’s Head of Africa, Gavin Smith. “It is not as simple a solution as it seems.
“Financial emigration should not be implemented as a knee-jerk reaction to the new expatriate tax laws. It’s a serious decision with long term implications that requires careful consideration.”
Smith explained that other options are available to help reduce the tax expats pay.
“Investing in a foreign pension scheme is an effective way of storing foreign income, tax efficiently,” he said.
“Such schemes enable people to invest in primary currencies that are less susceptible to fluctuations than the Rand, in highly credit rated and regulated jurisdictions. These funds have the benefit of being accessible to investors from the age of 50, which means they can return to South Africa, which is a relatively cost-effective country to live in, with a decent amount of capital.
“It goes without saying, however, that these kinds of investments should only be entered into with the correct advice.”