This FAQ article is based on tax law for the year ending 29 February 2024.
An employee resides in Ireland with her spouse, who has a 5-year contract there. She works for my client from the UK using her UK home office, internet, computer, and telephone. She visits South Africa for meetings about four times a year. She is a UK resident (not yet a citizen) and has no other income in the UK or elsewhere. Sage Payroll advises marking her as a foreign employee and using the foreign employee source code, as she qualifies for the R1.25 million exemption. At the end of the year, an IT3 will be issued to her, which she will submit to SARS for her tax. Is this the correct approach, particularly regarding the source code?
South Africa's tax system operates on a residence-based principle, where tax residents are liable for taxation on their global income, including income earned within South Africa. In contrast, non-residents are only subject to tax on income originating in South Africa and specific capital gains, ensuring fairness in the taxation system.
There are some sources of income that do not fall within the ambit of The Act, and the principles of the common law must be applied in these instances. The following sources of income will therefore be determined by the application of these principles (keeping in mind there is always nuance):
Income from employment and services rendered: The source of income will be the location where the person physically rendered their services to earn the said income.
South African sourced income is always taxable, regardless of whether the employee is or is not a tax resident of South Africa. The approach that SARS takes in determining where the income is sourced, is to determine where the service was rendered to “earn” the employee’s income. To assist the taxpayer in circumstances where they will be “double taxed” by SARS and the foreign country, there is relief provided for in Section 6quat of the Income Tax Act. If the employer is a South African company, and the employee is working remotely in another country, the employee could in effect be double taxed. The approach recommended by SARS is for the relevant employer to use a source code that reflect the tax status and tax liability of the taxpayer. Therefore, the principles of tax residency and the applicable income source rules must be properly, and carefully, applied in each case to determine which source code should be used on the IRP5 of the taxpayer.
It's advisable to review the Double Taxation Agreement (DTA) to determine her tax residency status, as South African tax residency is a prerequisite for eligibility for the R1.25 million Section 10(1)(o)(ii) exemption. She will receive an IRP5 for tax return filing purposes.
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