TAX INCENTIVES FOR FOREIGN SKILLS


ANDREW DUNCAN

If Trevor Manuel has his way, skilled professionals from overseas will soon be pouring in.  In his budget he referred to the need to attract expatriates with scarce skills to South Africa.  To this end he stated that “consideration is being given to changes to the tax “resident” definition to allow for extended South African visitation for expatriates working temporarily in South Africa”.  He added that as an alternative “tax amendments could seek to alleviate the Capital Gains Tax burden on foreign assets acquired before entry into South Africa (as well as certain subsequently acquired foreign assets)”.  It is pleasing to see this concern and emphasis.  A knowledge of what the tax consequences are is critical to such persons, their employers and professional advisers in South Africa including Estate Agents. However, the normal tax consequences to such visiting non-residents are not generally known.  A summary is set out below.

1.                       RESIDENCE

There are basically two tests to determine whether a person is a resident, namely firstly whether South Africa is their chosen place of normal residence, i.e. the place that a person habitually returns to and regards as home.  Secondly if a person does not have such an intention, i.e. they are temporarily seconded to South Africa then one looks to the physical presence test which requires that persons become residents if they are physically present in South Africa for more than 91 days during the fourth year of residence in South Africa and likewise for each of the three preceding years but altogether during the three preceding years, for not less than 549 days.  If this requirement is met then that person becomes a resident as from the 1^st day of the fourth year of assessment.

Thus, the Finance Minister is suggesting that the physical presence test can be changed so that the period of 549 days is extended further.

2.                       INCOME TAX CONSEQUENCES FOR FOREIGN EMPLOYEES

The first consequence is that any income received from employment in South Africa is subject to local taxation on the basis of source.  This will be at normal marginal rates subject to the tax threshold of R35 000,00 for the 2006 year of assessment (under 65) or R60 000,00 (over 65).  A foreign employee receiving employment income that exceeds the threshold is obliged to complete an income tax return.  If the salary is paid into a foreign account by a foreign employer, then the employee will be taxable as a provisional taxpayer but otherwise the local company will be required to deduct tax on a PAYE basis.  If the expatriate (“foreign employee”) is also subject to tax as a resident of another country, a double tax convention will generally provide the necessary credits resulting in the employee only being taxed in one of the two countries.  The same position adheres in regard to director’s fees paid to such foreign employee by a local company.

2.1                 ALLOWANCES AND FRINGE BENEFITS

Like any other local employee a foreign employee will be taxable on travel and subsistence allowances or such fringe benefits as are provided.  Often this includes residential accommodation.  The basic formula depending on the extent of the accommodation for calculating the monthly value of the fringe benefit is to take that person’s overall salary, to deduct R20 000,00 therefrom and use a factor of between 15% and 17% of the resulting total divided by the number of months the accommodation is occupied, i.e. take a salary of R500 000,00, the monthly taxable value would amount to R6 800,00!

2.2                 USE OF COMPANY CAR

The same provisions apply as do to a local employee namely that if granted the use of a motor vehicle by an employer a monthly benefit valued at 2,5% of the determined value is calculated;  the determined value being the original cost of the vehicle to the employer or where previously purchased the cost at that time less 15% per year until the employee has the use of it.  The only tax efficient means of a company car today is where an employee keeps a logbook of business use for a private vehicle.  At 2.5% per month the employee will be deemed to have received the full value of the car within three tax years which is a very expensive means of funding a motor vehicle!

2.3                 RELOCATION COSTS

Payments by an employer to cover expenses such as the transfer of a foreign employee are exempt from tax in the employee’s hands and includes the expenses of transporting the foreign employee and members of his/her household and personal goods and possessions from the previous place of residence as well as the cost of renting temporary residential accommodation for not more than 183 days!

2.4                 TAX DEDUCTIONS

While a foreign employee can deduct local pension fund contributions (limited to 7.5% of pensionable salary) or obtain deductions for retirement annuity fund contributions to local funds, limited to the greater of 15% of non-pensionable salary or R3 500,00, no deductions can be claimed from similar contributions to a foreign fund. 

2.5                 MEDICAL EXPENSES

These can likewise be deducted in terms of the normal formula being contributions made to a local medical aid scheme or a foreign medical aid scheme provided it is registered under “provisions that are similar to those in the Medical Schemes Act……”  Medical expenses not recoverable from a medical aid scheme whether incurred inside or outside South Africa can likewise be deducted but (for anyone under 65 years of age) can only be deducted to the extent they exceed 5% of taxable income. 

2.6                 INTEREST INCOME

Interest received by non-residents from a source within South Africa is not taxable but this is subject to the non-resident being physically absent from South Africa for at least 183 days during the tax year in question which may often not be the case in regard to a foreign employee.

2.7                 DIVIDENDS

A non-resident or foreign employee is not subject to tax on dividends from local companies.

3.                       CAPITAL GAINS TAX

At present Capital Gains Tax is payable by non-residents on any immovable property in South Africa including any interest or right of any nature in immovable property.  This would include shares in a company where 80% or more of the market value of its net asset value comprises immovable property and the non-resident holds 20% or more (directly or through connected persons) in the company.  Of course immediately a foreign employee becomes a resident his assets on a worldwide basis become subject to CGT and it is this that the Minister is seeking to ameliorate.  Self evidently no skilled foreign employee will wish to incur a tax of 10% on their assets outside South Africa for the privilege of having worked in South Africa for three years plus one! 

4.                       CUSTOMS DUTY VAT

There are various exemptions applicable to a foreign employee bringing in household effects or motor vehicles in regard to both VAT and customs duty.  Provided the same goods are taken back no such duties will be payable albeit that insofar as household effects are concerned they can be disposed of locally after a period of six months and one motor vehicle may be imported into the Republic free of duty and exempt from VAT.

5.                       ESTATE DUTY

Estate Duty at the rate of 20% is only payable on the death of a non-resident to the extent that a non-resident has property whether immovable or otherwise actually in South Africa.  Thus, if a foreign employee owns a house, Estate Duty will be levied on the house, its contents and the like or whatever else is physically in South Africa on death.  This can be avoided by ensuring that all such assets are held by an offshore or local Trust.

Many ex-South Africans returning after years abroad are under the mistaken impression that they will not be subject to Estate Duty in respect of assets purchased by them while they were non-resident, i.e. a London flat.  The exemption only applies in respect of property acquired overseas before a person becomes a resident in the Republic for the first time.  Thus, anyone born in the Republic and spending all but the last few years of their lives overseas but returning to reside in South Africa for those last few sun filled years will suffer Estate Duty on their worldwide assets.  Again this can be avoided by creating a Trust and donating all overseas assets to such Trust before, or to the extent that such assets were purchased from monies earned from a foreign trade, then even after becoming a resident in South Africa.

ANDREW DUNCAN

Tax lawyer in Specialist Financial Compliance firm