If you are a South African working abroad and still a tax resident in South Africa, take note that the so-called "expat tax" will come into effect in South Africa as from 1 March, 2020. In effect, the amendments to the Income Tax Act mean that South Africans working overseas will now only be exempt from paying tax on the first R1 million they earn elsewhere.

The rest of their earnings – including all fringe benefits, like housing, education and flight allowances – will now be taxed according to the normal tax tables for the year, which can go up to 45% in some cases.

"The expat tax exemption has always been there, it is now just being capped. This is because the intention was never to have South Africans working abroad not paying any tax at all. Yet this ended up being the case in certain places where no personal taxes are raised, like Dubai," Tim Mertens, chair of Sovereign Trust SA, tells Fin24.

"It is not a sudden change to penalise South Africans working abroad. The SA Revenue Service is merely looking to see where it can find more revenue and the legislation was not intended to give exemption where you end up not paying tax in both your home country and the place where you are working abroad."

He expects the impact will be particularly severe for the thousands of South Africans currently living and working in tax-free geographies, like most countries in the Middle East.

"Don't just keep quiet and do nothing," he advises.

Three options

Richard Neal, managing director of Sovereign Trust (SA), explains that there are basically three options for South Africans earning an income abroad.

1. Moving back to South Africa

Apparently, some South Africans are considering this option, as the new tax law regime will make it difficult to maintain their lifestyles abroad while continuing to honour local commitments, he says.

In Neal's view, however, this is not really an option for many who left for better opportunities, and may struggle to find a job in a tough economy in SA.

2. Financial emigration

Financial emigration is the formal process of changing one's tax status with the SA Revenue Service (SARS) and the SA Reserve Bank (SARB) from "resident" to "non-resident".

Neal says one must beware that this is not as simple or cheap.

"If you decide to financially emigrate, you will have to pay capital gains tax on your local assets and impose restrictions on assets remaining and that you might want to acquire in SA. Also, if you come back after five or ten years, your actions will be viewed with some suspicion," he adds.

3. Set up tax-efficient structures

If emigration or financial emigration isn't an option, you could consider setting up a structure to limit your liability and protect your foreign income and assets, he suggests.

For example, this could be setting up an offshore professional services company in a tax-friendly jurisdiction that could then invoice an international employer. However, this would have to take into account the new substance requirements introduced in most of the offshore jurisdictions.

Another option to consider would be an investment portfolio housed within an international retirement plan, especially if retirement contributions fall into the new "expat tax" threshold.

Neal says this will minimise your tax exposure, as plans like these are exempt from capital gains tax on the initial capital invested, there is no tax on interest earned and there is potentially no estate duty, which makes it an efficient succession planning mechanism.