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SA residents working overseas will benefit from tax amendments relating to deferred payment schemes

24 October 2007 PricewaterhouseCoopers

South African tax residents working overseas enjoy an exemption from tax for remuneration received for foreign services, provided that they are outside of SA for more than 183 days (of which 60 are consecutive) in a 12 month period.
 
Samantha Grobler, PricewaterhouseCoopers SA senior manager of International Assignments, says the current wording of the exemption causes problems where a person receives deferred remuneration such as share option gains or bonuses. 
 
"The problem arises because the exemption only applies to remuneration received for services in a qualifying 12 month period ending (or beginning) in the specific year of assessment.  The services giving rise to share option gains are often rendered over a much longer, say 3 to 5 year, qualifying period. So even if the services were rendered outside of South Africa for most of the 3 to 5 year period, the exemption would not apply to the whole amount as the exemption legislation looks only at the tax period when the deferred remuneration is eventually received. It would therefore be taxed to a much greater extent if the resident returns home at that crucial time."
 
There was also some uncertainty whether certain payments such as termination benefits and full travel allowances in respect of foreign services fell into the exemption category but this will be clarified by the amendments.
 
Grobler says that proposed amendments to section 10(1)(o)(ii) seek to deal with the anomalies relating to deferred compensation and better define what amounts are to be exempt.
 
"Many SA companies are moving more towards share-based payments, even for employees working abroad for a period of time, so these changes are most relevant and welcome. The wording of the exemption has been amended and has a broadening impact such that deferred compensation if earned in a qualifying period (although not accruing for tax purposes in that period) will be exempt when it accrues in any fiscal year.  For the purposes of computing the amounts to be exempt, a new provision deems income to accrue evenly over the period that the services were rendered so the entire overseas period will now be taken into account when computing any amounts to be taxed.
 
Another welcome relaxation is that amounts qualifying for exemption have been redefined.  "The exemption was previously applicable to remuneration as strictly defined in the fourth schedule, so for example, 40% of a travel allowance received by an SA resident working abroad would not have fallen into the exemption. But the proposal is that amounts that now qualify for exemption are restricted to any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument and includes the taxable value of fringe benefits and gains taxable in terms of section 8C (share option gains). So the 40% travel allowance would now qualify for the exemption." 
 
Another possible benefit from the amendments is that by redefining the remuneration requirement for the exemption, self employed consultants rendering services overseas could now qualify for exemption on the fees they earn. But Grobler cautions it is unclear whether this is an intended widening of the exemption or an unintended result of the legislative changes.
 
But the downside of the proposed amendments is that they will clearly exclude any termination or severance type payments from the exemption. "This tightening relates to the fact that these termination awards are not for services rendered."

 
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