As a South African expat who has not formally emigrated and works outside of South Africa, it's important to understand the Foreign Employment Income Exemption, also known as S10(1)(o)(ii) of the Income Tax Act.
The S10(1)(o)(ii) provision states that your foreign income, up to a limit of R1.25 million, may be exempt from South African tax, given that certain criteria are met:
You are a South African tax resident.
You spend at least 183 days of a consecutive 12-month period outside of South Africa rendering services for your employer. Keep in mind, the 183-day rule includes all calendar days, such as weekends, public holidays, annual leave, etc.
At least 60 of these days are continuous or unbroken.
Earn certain types of remuneration (see below).
Have an Employment contract (with a resident or non-resident employer).
What types of income/remuneration qualify for the S10(1)(o)(ii) exemption
Salary
Wage
Taxable benefits
Leave pay
Overtime pay
Bonus
Gratuity
Commission
Fee
Emolument
Allowance (including travel allowances, advances and reimbursements)
Amounts derived from broad-based employee share plans
Amounts received in respect of a share vesting
What about other foreign income?
If you’re a South African resident (for tax purposes), you will be subject to tax on worldwide income (excluding certain exemptions or exclusions) and non-residents will be subject to tax on income from a source within South Africa. As an expat, you will therefore need to include all the below in your tax return:
Foreign dividends & interest income
Foreign rental income
Foreign trade income
Foreign royalties
Understanding the 183-Day / 60 Continuous-Day Test
This rule is often confusing, so let's break it down simply.
The 183-day count includes all types of days: weekends, holidays, and any leave days, provided you're employed. To qualify for the exemption, a person must be in employment, outside of South Africa, for at least 183 full days during any 12 month period. A “full day” means 24 hours (from 0h00 to 24h00). The 183 full days do not have to be consecutive or continuous but, to meet the exemption requirements, a total of 183 full days in any 12-month period must be exceeded. It is not necessary to exceed this period by a full day. Any amount of time in excess of 183 full days, such as a few hours, will be sufficient.
The "consecutive 12-month span" is any rolling 12-month period, not necessarily aligned with the calendar or fiscal year.
Say you have a contract from May 1, 2021, to October 31, 2022:
Start by counting 12 months from the first day, i.e., May 1, 2021, to April 30, 2022.
Confirm you were outside South Africa for at least 183 days during this period.
Ensure 60 of these days were consecutive.
If this doesn't work, count 12 months backwards from the contract's end date, October 31, 2022, to November 1, 2021, and reapply the checks.
If you meet the 183-day / 60 continuous-day conditions using either method, you could be eligible for non-taxable income.
Calculation of the S10(1)(o)(ii) exemption
To figure out how much of your income is exempt, use the following formula:
[(Working days outside of South Africa for the specific period / total work days for the period) x the remuneration received for the period]
Note: "Work days" refers only to the days when services are rendered. This excludes weekends, public holidays, or leave taken. The "period" refers to the full period during a year of assessment over which a taxpayer is required to render services outside of South Africa.
Tax Year: In South Africa, the tax year runs from 1st March to the end of February the following year.
Example of the S10(1)(o)(ii) exemption
Assuming the taxpayer has passed the 183-day and 60-day test, and earned R1,000,000 foreign income while working overseas.
Total working days outside of South Africa: 180 days
Total working days for the period: 200 days
Tax exempt income in terms of S10(1)(o)(ii) = 180/200 X R1,000,000 = R900,000
Do Independent Contractors and Self-Employed Individuals qualify for S10(1)(o)(ii) exemption?
Independent contractors and individuals who are self-employed also do not qualify for the exemption as such persons are not in an employment relationship. If you own a company and receive a salary from your company, this could qualify as an employment relationship.
What If You Don't Meet the Criteria?
If a taxpayer fails to meet the 183-day and 60-day criteria, the S10(1)(o)(ii) exemption won't apply, and their foreign income could be subject to South African tax.
Income Over R1.25 million
For foreign income exceeding R1.25 million, it may be subject to South African tax at the applicable rates.
Reporting and Documentation
To claim the exemption, report your exempt income on your tax return. Make sure to keep documentation as evidence of your overseas work, like flight tickets and accommodation receipts, which may be required by SARS.
Foreign Taxes
Be mindful of potential tax obligations in the country where you work. Each country has its own tax laws, which could impact your overall tax liability.
Can You Face Double Taxation and How to Avoid It?
Yes, you could experience double taxation if you earn more than R1.25 million and no exclusive tax agreement exists between South Africa and the foreign country involved. Typically, if you work abroad for over 183 days, both countries reserve the right to tax your income. However, South Africa offers a foreign tax credit to mitigate this, subject to limitations. This credit, known as Section 6quat, can be claimed on your tax return if you meet certain conditions. Employers also have an option to request a SARS directive to adjust monthly tax calculations, considering this credit, through a specific SARS channel.
How do I claim the S10(1)(o)(ii) exemption on SARS eFiling?
See our guide for how to account for the S10(1)(o)(ii) tax exemption when completing your tax return on SARS eFiling.
Conclusion
The S10(1)(o)(ii) provision is a valuable tool for South Africans working abroad, but understanding its nuances is critical. Always seek professional tax advice to ensure you meet all requirements and maximise your tax efficiency.