South Africa follows a worldwide basis of taxation, meaning that South African tax residents are subject to tax on their worldwide income. This principle is subject to certain exemptions or exclusions, particularly those for foreign employment income. Yes, there is more than one exemption, commonly referred to as the foreign employment income exemption and the seafarers’ exemption.
Foreign Employment Income Exemption
A South African tax resident’s foreign employment income from employment services rendered abroad is exempt from income tax up to R1.25 million. Any foreign employment in excess of R1.25 million will be subject to normal tax in South Africa.
To qualify for the exemption, a taxpayer must be a South African tax resident who earns certain types of remuneration from employment rendered outside South Africa, and specific qualifying periods must be complied with. In summary:
- Remuneration that qualifies is amounts received by an employee by way of salary, leave pay, wages, overtime pay, bonuses, gratuities, commission, fees, emoluments, or allowances for services rendered.
- The exemption only applies where there is an employment relationship. In other words, the taxpayer must render the services under an employment contract and on behalf of any employer.
- The taxpayer must receive the remuneration in respect of services that they must render outside South Africa.
- The taxpayer must be employed outside South Africa for at least 183 full days during any 12 months, noting that the 183 full days refer to calendar days and need not be consecutive. This test relates to a person’s employment, and days spent outside South Africa when a person is not employed do not qualify as days for the 183-day test.
- Furthermore, the taxpayer must render services outside South Africa for a continuous period exceeding 60 full days in the same 12-month period. Taxpayers must be able to substantiate these periods and may be requested to provide documentation when claiming the exemption, which may include passports, travel schedules, and employment contracts.
Notably, not all income below the R1.25 million threshold is exempt. The exemption applies only to remuneration received in respect of services rendered outside South Africa during the qualifying period. An apportionment may be applicable if income relates to services rendered in and outside South Africa. Where services are only incidentally provided in South Africa, the originating cause of the employment will be outside South Africa, and no apportionment will be necessary.
Seafarers exemption
Under the seafarer’s exemption, officers’ and crew members’ employment income for services rendered on a ship is fully exempt from income tax. Unlike the foreign employment income exemption, there is no limitation.
To qualify for the seafarers’ exemption, a taxpayer must be a South African tax resident who is an officer or crew member of a ship who earns remuneration from employment rendered outside South Africa, and certain qualifying periods must be complied with. In summary:
- Any form of remuneration derived by an officer or crew member of a ship outside South Africa is exempt. However, only remuneration the officer or crew member receives during a year of assessment when the requirements are met, qualifies. Remuneration earned before that year of assessment commences (1 March) or after the year of assessment ends (28 February) would not qualify for the exemption.
- The exemption only applies to officers or crew members aboard a ship in an employment relationship. In other words, the taxpayer must render the services under an employment contract and on behalf of any employer.
- The exemption only applies if the taxpayer works aboard a ship engaged in the international transportation of passengers or goods for reward or in prospecting, exploration, mining or production.
- The taxpayer must receive remuneration for services rendered as an officer or crew member aboard a ship outside South Africa.
- The taxpayer must be employed outside South Africa for at least 183 full days during the year of assessment (1 March to 28 February), noting that the 183 full days refer to calendar days and need not be consecutive.
Notably, the seafarer’s exemption does not envisage apportionment (unlike the foreign employment exemption); once all the requirements for the exemption are met, all the remuneration derived by the taxpayer during the year of assessment will be exempt.
When calculating whether a taxpayer (for either exemption) was outside South Africa for the qualifying period, weekends, public holidays, annual leave days, sick leave days, and rest periods spent outside South Africa are taken into account. A travel day from and to South Africa is not taken into account.
Although the requirements may appear simple, each involves a detailed and complex analysis based on each taxpayer’s facts. We recommend approaching your tax advisor before filing the relevant income tax return if you receive foreign employment income. Even if your employment income is exempt from tax, you may still be required to file an income tax return.