[FAQ] Foreign income and the applicable tax rate

[FAQ] Foreign income and the applicable tax rate

• 09 November 2020
• Individuals Tax
• Piet Nel

Background

If a taxpayer is working abroad and has received income in excess of R1.25million, what will the tax rate be on the amount in excess?

Answer

The Income Tax Act

From 1 March 2020, if all the requirements of section 10(1)(o)(ii) are met, the exemption that the individual is entitled to would indeed then be an amount of R1.25 million. This will be applied by SARS on assessment.

The tax payable is determined on the taxable income of the individual concerned. You start with the gross income of the individual, with respect to the foreign remuneration converted to ZAR at the spot rate or average rate. That is reduced by the section 10(1)(o)(ii) exemption (which equals ‘income’ as defined). The person, in determining his or her taxable income in the Republic, would only be entitled to make a deduction of items allowed by the South African Income Tax Act – in other words, not all the deductions on the foreign payslip may qualify for deduction. The contributions to the approved retirement funds will be limited – see section 11F – and there is a specific order (and apportionment) that must be observed. The same applies to section 18A.

Application of the principles

The tax rate, applicable to the taxable income is applied to the taxable income (from 18% onwards). With regard to the foreign tax, when the calculation of the foreign tax rebate is done, remember the section 6quat(1B) limit. The rebate of any tax proved to be payable to any sphere of government of any country other than the Republic, without any right of recovery, must not “in aggregate exceed an amount which bears to the total normal tax payable the same ratio as the total taxable income attributable to the income, proportional amount, taxable capital gain or amount, as the case may be, which is included as contemplated in section 6quat(1), bears to the total taxable income.”

In addition, section 6quat(1B), which must be read with section 11F (contributions to retirement funds), section 18A (donations) and section 6quat(1C) prescribes the order of the deductions. SARS’s interpretation Note 18 explains this quite well.

Webinar Commentary

Further webinar commentary on Tax 2020: The Tax Migration vs Financial Emigration can be accessed here.

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