INTERPRETATION NOTE 16 (4):
This interpretation note discusses the interpretation and application of the foreign employment remuneration exemption in section 10(1)(o)(ii) of the Income Tax Act (IT Act) as well as the correct method of apportionment.
To qualify for the exemption, a taxpayer must be a tax resident of South Africa who earns certain types of remuneration for employment services RENDERED OUTSIDE THE REPUBLIC.
- The exemption relates to remuneration received or accrued for services that were rendered outside the Republic during the qualifying periods.
Periods outside the Republic where no remuneration was earned fall outside the ambit of section 10(1)(o)(ii).
Remuneration received after a qualifying period, but in respect of such qualifying period, will qualify for the exemption, but subject to any applicable apportionment. - Only income relating to foreign services is exempt.
- There must be an employment contract.
STEP 1 = Days test to determine whether you qualify for the section 10(1)(o)(ii) exemption.
- 183 full days (calendar days – NOT workdays) in aggregate outside the Republic.
- During the 183 days – 60 days must be continuous.
- The period or periods exceeding 183 full days mentioned above must fall within a period of 12 consecutive months. The period of 12 months is not necessarily a year of assessment, a financial year, or a calendar year; it is ANY period of 12 consecutive months.
When an individual meets the requirements according to the “Day’s test” the individual qualifies for the R1250 000 exemption.
Any foreign employment income earned over and above the R1 250 000 will be taxed according to the normal tax rates in SA.
STEP 2 = APPORTIONMENT OF REMUNERATION:
Only the remuneration received or accrued in respect of services rendered outside the Republic during the qualifying period of 12 months is exempt in terms of section 10(1)(o)(ii).
Apportionment of remuneration will be done when an employee came back to SA for service to be rendered in SA during the period foreign income was also earned – section 10(1)(o)(ii) period. The apportionment will be calculated as follows:
Workdays outside the Republic for the period / Total workdays for the period x remuneration received during the period = remuneration that may qualify for the exemption under section 10(1)(o)(ii)
Please note:
- Workdays do not include weekend, public holidays or leave days, therefore only days of actual services rendered are considered.
- Period refers to the full period during a year of assessment over which a taxpayer is required to render services outside the Republic.
For example:
Amanda was contracted to work in New York during the 2021 tax year – the period (2/5/2020 to 19/12/2020), earning foreign income.
– Step 1
- days test:
- Period earning foreign income – 2/5/2020 to 19/12/2020 more than 183 days and 60 consecutive days.
- Qualify for section 10(1)(o)(ii) exemption.
– Step 2
- apportionment of remuneration:
- Foreign remuneration earned during the period = R1 500 000.00.
- Total workdays = 161 days.
- In SA for work = 22 workdays and 3 days leave.
- Total Foreign workdays = 136 days (161
- 22 (SA days) – 3 (days leave))
- Total workdays during the period = 161 less 3 leave days = 158 actual workdays during period.
Workdays outside SA / Total workdays for the period x Remuneration received during the period = remuneration that may qualify for the exemption under section 10(1)(o)(ii).
136 / 158 x R1 500 000.00 = R1 291 139.24 qualify for the exemption under section 10(1)(o)(ii), but the exemption is limited to R1 250 000.00.
INTERPRETATION NOTE 18(4):
Section 6quat is the mechanism under South Africa’s domestic law to claim relief from double tax where the amount received for services rendered outside the Republic is subject to tax in the republic and in the foreign country.
This effectively means that foreign tax paid on the portion of remuneration included in income will be set-off against the South African normal tax paid. The employee is required to submit an income tax return in which the actual foreign tax credit under 6 quat should be claimed.
STEP 3 = Section 6quat foreign tax credit.
Step 3.1: Limitation of the taxes under section 6quat(1A)
Under section 6quat(1A)(a)(i) foreign taxes qualify for a rebate under section 6quat(1) that are limited to foreign taxes in respect of foreign income included in a resident’s taxable income.
Determine what amount of the foreign tax paid is attributable to the taxable foreign income included in total taxable income.
Remuneration for foreign services included in taxable income / Total remuneration for foreign services x
Foreign Tax.
Step 3.2: Limitation of the rebate under section 6quat(1B)(a)
The purpose of the limitation in section 6quat(1B)(a) is to ensure that the rebate granted for foreign taxes proved to be payable relates only to the foreign income included in a resident’s taxable income. If no foreign income is included in a resident’s taxable income, no rebate will be available even if the foreign tax is proved to be payable by the resident.
Taxable income derived from all foreign sources / Total taxable income derived from all sources x Normal tax payable.
Example – Amanda (Step 2):
| – Taxable remuneration from foreign sources | R 41 139.24 (A) (R1 291 139.24 – R1 250 000.00) |
| – Total remuneration for foreign services | R 1 500 000.00 (B) |
| – Foreign tax | R 350 000.00 (C) |
| – Total taxable income from all sources | R 785 000.00 (D) |
| – Normal tax payable | R 230 237.00 (E) |
Step 3.1: Limitation of the taxes under section 6quat(1A):
A/B x C = R9 599.16 (Portion of foreign tax qualifying for a rebate under sect 6quat(1) -withholding tax)
Step 3.2: Limitation of the rebate under section 6quat(1B)(a)
A/D x E = R12 065.96 (Amount of allowable 6quat rebate.)
Allowable 6quat1 rebate = R9 599.16.
If step 3.1 (6quat(1A) amounted to R14 000.00 and step 3.2 (6quat(1B) amounted to R10 000.00 then an amount of R4 000.00 will be carried forward to the 2022 year of assessment under paragraph (ii)(aa) of the proviso to section 6quat(1B)(a).
Each taxpayer’s (SA Tax resident) situation will have to be looked at according to their specific facts and figures.
If you have any enquiries, please contact Adri Britz at abritz@fhbc.co .za
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