Foreign Income Exemption vs Tax Residency South Africa (Key Differences Explained)
Foreign income exemption and tax residency are not the same. Tax residency determines whether you are taxed on worldwide income. The foreign income exemption is a relief mechanism that allows qualifying residents to exclude up to R1.25 million of foreign employment income from tax.
What Is Tax Residency in South Africa?
Tax residency determines which country has the right to tax you on your worldwide income.
You are a tax resident if:
- You are ordinarily resident in SA, or
- You meet the physical presence test
Impact:
- Residents are taxed on worldwide income
- Non-residents are taxed only on SA income
Understanding Ordinary Residence
In South African tax law, the idea of “ordinary residence” is key to deciding if someone is considered a tax resident. In general, a person is considered to be ordinarily living in South Africa if it is the place they return to after travelling and where their main and permanent life interests are.
Many things are taken into account when determining ordinary residence. This includes where a person’s main home is, their family and social connections, their business activities, their doctor’s location, and many other factors.
A Double Tax Agreement (DTA) can override local laws and state that a person is a tax resident in the country where their only available home is located.
Understanding the Physical Presence Test
A person who is not a tax resident of South Africa becomes a tax resident if they have been in South Africa for over 91 days each year for the past 5 years and a total of more than 915 days during those 5 years.
Why These Two Concepts Get Confused
Most expats assume: “If I work overseas, I’m not a tax resident.”
This is incorrect. A taxpayer’s workplace does not determine their tax residency status. DTAs specifically refer to the location where a taxpayer has a home available to themselves.
When a taxpayer leaves their family at home, it indicates that a residence is available in South Africa. A DTA often references other factors such as where a person’s centre of vital interests is, or where a person’s habitual abode is. All of these concepts are complicated and often conflict.
For example:
A taxpayer who leaves their family at home would have a home available in the foreign country as well as in South Africa creating a conflict. Their centre of vital interests and personal relationships would also be conflicted since having work in one country and a spouse in another creates further tension. A DTA would normally conclude that in such a case, a taxpayer would be resident where they are a national and since their family lives in South Africa, they are likely to be a national of South Africa.
DTAs can be complex, and taxpayers often decide based on avoiding South African taxes instead of carefully following the specific rules.
In summary, you can:
- Live abroad
- Work abroad
- And STILL be a tax resident
Scenario Examples
Scenario 1: SA Resident Working in Dubai, Spouse in South Africa
A SA tax resident works in Dubai while his wife continues to live in South Africa.
The taxpayer returns to South Africa every 3 months to spend time with his family. The taxpayer met all the requirements for the Section 10 exemption to apply. Assume the taxpayer earned R2,000,000 employment income.
- The full R2 million must be declared on his South African tax return
- Taxpayer will qualify for the Section 10 exemption of R1,250,000
- The balance of R750,000 will be taxable. If the taxpayer has no other income and no other deductions, his taxable income would be R750,000
- Since the UAE is a tax-free jurisdiction, the taxpayer cannot claim any foreign taxes as a credit in South Africa under Section 6quat
- Taxpayer will have to pay provisional taxes on R750,000 before the end of the tax year to avoid underpayment penalties
Despite there being a DTA between South Africa and the UAE, the taxpayer is unable to argue that his only residence is in the other country since his spouse lives in a residence which is available to the taxpayer. The rest of the criteria would also result in a conflict and thus, the taxpayer would be deemed a tax resident in the country of which they are a national – South Africa, for the purposes of this example.
Scenario 2: Divorced SA Resident Working in Dubai
A South African tax resident is working in Dubai after recently going through a divorce.
The taxpayer stayed in Dubai all year, except for a holiday in South Africa from mid-December to mid-January, staying at an Airbnb and spending time with his children. Assume the taxpayer earned R2,000,000 from their job.
- Taxpayer is able to show that his only home is in Dubai and that he or she has no residence available in South Africa
- The taxpayer may apply to have his residency status updated as a non-tax resident of South Africa, even though he or she plans to return to South Africa to retire
- The full R2 million will be exempt and there is no need to apply for the Section 10 exemption
- The taxpayer would not need to pay any provisional taxes
- The taxpayer should still tally up his income for the South African tax year and declare that income as exempt income since they plan on returning to South Africa in a few years
- Taxpayer need not be a citizen of Dubai to be considered a non-tax resident of South Africa
Strategic Implications: Exemption vs Ceasing Residency
Option | Complexity | Risk | Benefit |
Use exemption | High | High | No deemed disposal of worldwide assets |
Break residency | High | High | Full tax exit |
There is more to consider than just ceasing tax residency. A taxpayer should consider:
- Duration abroad: Ceasing tax residency may not be appropriate if the taxpayer intends to reside in the other country for only one year
- Projected earnings: If the duration of stay is anticipated to be only one or two years but the income is substantial, it may be more advantageous to relinquish tax residency, even if the stay is relatively brief
- Global assets: When a taxpayer holds significant unrealised capital gains, ceasing tax residency may result in a capital gains tax, commonly referred to as an exit tax
Which Reduces Tax More?
The decision to either cease tax residency or invoke Section 10 relies on the specific circumstances of each case, including the level of income, the duration of stay abroad, and the fulfilment of eligibility requirements. If the requirements for ceasing tax residency are not fulfilled, the taxpayer should utilise the exemption provided under Section 10.
Otherwise, the following general principles apply:
- Short-term: If the taxpayer plans to be out of the country for 6 to 12 months and gross income is under R1,250,000, then using Section 10 would be easier
- Long-term: For taxpayers planning to depart the country either permanently or for an extended period, managing the process of ceasing tax residency becomes significantly more straightforward
Further information: Ceasing tax residency does not equate to relinquishing citizenship. It also does not prohibit a taxpayer from holding any fixed assets or investments within the country.
This simply indicates that the foreign country holds the authority to tax your global income, and South Africa no longer retains this entitlement.
A taxpayer will, nevertheless, remain subject to taxation on income derived from South African sources. A non-resident earning interest from a South African bank may qualify for a full exemption under Section 10(h), provided the individual was physically absent from South Africa for at least 183 days prior to the accrual of the interest.
When to Use Each Strategy
Situation | Strategy |
Contract work abroad | Exemption |
Permanent relocation | Residency status update |
High income (>R1.25m) | Assess personal situation and plan accordingly |
Common Mistakes to Avoid
Assuming residency automatically changes Some individuals assume that simply leaving the country completes the entire process. Taxpayers are required by SARS to formally notify them of any changes in tax residency through an official application process.
If deemed satisfactory, SARS will issue a letter confirming approval of your non-residency status. Failure to adhere to this process may lead to SARS continuing to regard the individual as a tax resident and, upon identifying the foreign income, issuing an assessment. Taxpayers may also face challenges in accessing their retirement funds if they have not updated their tax residency status with SARS.
Not planning before leaving SA Certain taxpayers maintain employment with their former South African employer despite no longer being tax residents. As the employer lacks formal confirmation from SARS regarding the taxpayer’s cessation of tax residency, PAYE deductions are still being applied and local source codes are used in generating the IRP5, despite this income qualifying as fully exempt.
Ignoring exit tax (CGT) The term “deemed disposal” is often misunderstood. Most taxpayers assert that they have not engaged in the disposal of any assets and therefore no capital gains have been realised.
However, when a taxpayer ceases their tax residency, it is presumed that they take their assets along with them. The legislation explicitly stipulates that a taxpayer is considered to have disposed of their global assets at market value, regardless of whether an actual disposal has occurred.
Arrangements must be made to account for the taxes arising from this deemed disposal.
Decision Framework
Question | Action |
Staying abroad temporarily? | Use the Section 10 exemption |
Leaving permanently? | Consider ceasing tax residency |
Frequently Asked Questions
Can I use both the exemption and non-residency?
Yes, though only under specific conditions when an individual qualifies as a tax resident for part of the tax year but subsequently departs the country during that same year, resulting in the cessation of their tax residency.
Which is better: exemption or ceasing residency?
The decision relies on the specific circumstances of each case, including the level of income, the duration of stay abroad, and the fulfilment of eligibility requirements. If the requirements for ceasing tax residency are not fulfilled, the taxpayer should utilise the exemption provided under Section 10.
- Short-term (6–12 months, income under R1,250,000): Section 10 exemption is easier
- Long-term or permanent: Ceasing tax residency becomes more advantageous
Ceasing tax residency does not equate to relinquishing citizenship, nor does it prohibit a taxpayer from holding fixed assets or investments within South Africa. It simply means the foreign country holds the authority to tax your global income. A taxpayer will remain subject to taxation on income derived from South African sources. A non-resident earning interest from a South African bank may qualify for a full exemption under Section 10(h), provided the individual was physically absent from South Africa for at least 183 days prior to the accrual of the interest.
Does ceasing tax residency mean I no longer need to submit a South African tax return?
Not entirely. Even after ceasing tax residency, a taxpayer may still be required to submit a South African tax return if they earn income from South African sources such as rental income, interest, or dividends. SARS must also formally confirm the change in residency status before a taxpayer can treat themselves as a non-resident. Until that confirmation is received, SARS will continue to expect a return on worldwide income.
What happens to my retirement annuity or pension if I cease tax residency?
Ceasing tax residency does not automatically allow you to access or withdraw your retirement annuity. South African retirement funds are governed by the Pension Funds Act, and withdrawal rules apply regardless of residency status.
However, updating your tax residency status with SARS is a prerequisite for the emigration process through your fund administrator, which may eventually allow access to those funds. This is a complex area and specialist advice is strongly recommended before making any decisions.
If I return to South Africa permanently after working abroad, do I automatically become a tax resident again?
Yes. If a taxpayer returns to South Africa and re-establishes it as their ordinary place of residence – where their family lives, where they intend to stay, and where their primary life interests are – SARS will regard them as a tax resident again from that point. The taxpayer should formally notify SARS of the change and ensure their residency status is updated accordingly. Any foreign income earned after the date of return will be subject to South African tax on a worldwide basis.