Misconception that Foreign Income is not Taxable in SA

A common misconception among South African tax residents is the belief that foreign income is not taxable in South Africa, or that it only needs to be declared if taxes are paid abroad. This misunderstanding can lead to incorrect tax reporting and potential penalties. Here are some key points to clarify this misconception: 

Misconception: Foreign Income is Not Taxable in South Africa

Reality: South African tax residents are taxed on their worldwide income, which includes all income earned both within and outside of South Africa. This global taxation principle applies regardless of where the income is earned or received. Therefore, foreign income such as salaries, dividends, interest, rental income, and capital gains must all be declared and are potentially subject to tax in South Africa. 

Foreign Dividends

Foreign dividends are subject to specific tax rules in South Africa, and there are several misconceptions about how they are treated: 

  1. Foreign Dividends are Fully Taxable at Standard Tax Rates  

Foreign dividends received by South African tax residents are not fully included in taxable income at the standard marginal tax rate. Instead, only a portion of the foreign dividend income is included in the taxpayer’s gross income. SARS will allow a tax exemption which equates to 25/45 of the Rand value of the foreign dividend.  If foreign tax has been paid on the dividend this should be declared on the taxpayers’ tax return as this will reduce the amount of local tax payable on the foreign dividend received.  

Qualifying foreign dividends are generally not subject to tax where they are received by resident shareholders holding in excess of 10% of the equity shares and voting rights of the foreign company declaring the dividend.  

  1. Foreign Dividends are Always Exempt if Taxed Abroad  

While foreign dividends may be taxed in the country of origin, this does not automatically exempt them from being taxed in South Africa. To avoid double taxation, a tax credit is available (subject to a Double Tax Agreement being in place), but it is limited to the lesser of the actual foreign tax paid or the South African tax liability on that income. 

  1. No Need to Report Foreign Dividends if They are Below a Certain Amount  

All foreign income, including dividends, must be declared to SARS, regardless of the amount. There are no thresholds below which foreign dividends can be excluded from reporting. 

  1. Only Dividends Physically Remitted to South Africa are Taxable  

South African tax residents are taxed on foreign income regardless of where it is held or received. Therefore, even dividends kept abroad must be declared and are potentially taxable. 

Foreign Pensions

A prevalent misconception is that foreign pensions are exempt from South African taxes. However, this is not automatically true: 

  1. General Taxability of Foreign Pensions  

Foreign pensions are generally taxable for South African residents unless a specific exemption applies. 

  1. Exemptions Under Double Taxation Agreements (DTAs)  

DTAs do not automatically exempt foreign pensions from South African tax. They may prevent double taxation by allocating taxing rights between countries or providing tax credits. 

  1. Lump-Sum Pensions and Annuities  

Both lump-sum payments and annuities from foreign pensions can be taxable in South Africa, depending on various factors including the period of accrual and specific DTA provisions. 

  1. Exemption for Pensions Accrued While Non-Resident  

South African tax residents are taxed in South Africa on amounts received by or accrued to them from worldwide sources and includes pension benefits, irrespective of where these amounts are paid. However, the Income Tax Act exempts the following receipts and accruals: 

  1. Any amount received by or accrued to a tax resident under the social security system of any other country; and 

  1. Any lump sum, pension, annuity received by or accrued to a tax resident from a source outside South Africa, as consideration for past employment outside South Africa. It should be noted that any amounts received from local retirement funds do not qualify for the exemption, irrespective of where the services were performed. 

Foreign Employment Income

Another misconception is that income earned from employment abroad is exempt from South African tax: 

  1. General Rule: Worldwide Income is Taxable  

South African tax residents are taxed on their worldwide income, including foreign employment income, unless specific exemptions apply. 

  • Foreign Employment Income Exemption The first R1.25 million of foreign employment income may be exempt if the individual meets specific criteria, such as being outside South Africa for more than 183 days in a 12-month period, of which at least 60 of these 183 days must be continuous. 

  1. Double Taxation Agreements (DTAs)  

DTAs may provide relief from double taxation, but they do not necessarily exempt foreign employment income from South African tax. 

Misconception: Foreign Taxes Paid Eliminate South African Tax Liability 

Reality: While foreign tax credits or exemptions under DTAs can reduce the tax payable in South Africa, they do not eliminate the requirement to declare foreign income. If the foreign tax rate is lower than the South African rate, additional taxes may still be due. 

Misconception: Only Income Physically Brought into South Africa is Taxable 

Reality: All foreign income, whether kept abroad or transferred to South Africa, is subject to tax for residents. 

Misconception: No Tax Payable in South Africa Due to a DTA 

Reality: A DTA does not automatically eliminate tax obligations in South Africa. It aims to prevent double taxation but may still require taxes to be paid in South Africa, depending on the specifics of the agreement. 

Conclusion

South African tax residents are required to declare all foreign income and may still be liable for additional taxes even if they have paid taxes abroad. Misconceptions about the taxation of foreign income, including dividends, pensions, and employment income, can lead to non-compliance and penalties. It’s crucial for taxpayers to understand their obligations, utilise DTAs appropriately, and seek professional advice to navigate these complexities and ensure compliance with South African tax laws.