Paid in Dollars? The R1.25m Exemption Probably Isn't Yours

If you are a South African earning in dollars, pounds or euros, you have probably heard about the R1.25 million foreign income exemption — and quite possibly been told it applies to you.

For most people asking, it does not. SARS is explicit about two things that between them exclude the majority of remote workers.

One: you have to be an employee

From SARS's own FAQ on the exemption, listing who is excluded:

Independent contractors and individuals who are self-employed also do not qualify for the exemption as such persons are not in an employment relationship

That sentence removes most of the people who search for this. Freelancers, consultants, contractors, anyone invoicing overseas clients through their own name or company — the exemption is for employment income, and SARS lists the requirement as being "in respect of services rendered by way of employment".

If you invoice rather than receive a payslip, this exemption is not the one that helps you.

Also excluded: public office holders appointed under an Act of Parliament, and employees of national, provincial or local government, certain constitutional institutions and public entities.

Two: the work has to happen outside South Africa

The second requirement is geographic, and it is the one that catches genuinely-employed remote workers.

SARS lists the requirement as services rendered "outside South Africa", and the qualifying period test is about your physical location:

An employee who is a tax resident in South Africa must be outside South Africa for a period or periods exceeding 183 full days (in aggregate) during any 12-month period, and a continuous period exceeding 60 full days during that 12-month period.

Sitting in Cape Town working for a company in London is not services rendered outside South Africa. The employer being foreign does not make the work foreign. Where your body is when you do the work is what the test measures.

And if you split your time, the income splits with it:

if you rendered services inside and outside of South Africa, the income received should be apportioned and only the income received in respect of work days outside South Africa during which services were rendered, will be exempt

What the exemption actually is, when it does apply

For a South African tax resident who is an employee and does meet the days test:

From 1 March 2020, if the requirements are met, the exemption is limited to R1,25 million. Any remuneration received in excess of R1,25 million will be subject to normal tax in South Africa, irrespective of whether tax is paid in another country.

That last clause matters. Exceeding the cap does not become someone else's problem because you paid tax abroad. Relief from double taxation is a separate mechanism — SARS points to the section 6quat credit, subject to limitations, or treaty provisions where applicable. We have not covered how either works.

SARS is also clear about the framing: asked whether this created a new "expat tax", the answer is "No, there is no new 'expat tax' introduced." The requirements did not change in 2020; only the cap was added.

The misunderstanding that costs the most: financial emigration

This is the other finding, and it is widely got wrong.

Emigration is not connected to an individual's tax residence. It is merely one factor that may be taken into account to determine whether an individual broke his or her tax residence. An individual's tax residence is not automatically broken when he or she emigrates for exchange control purposes. The deciding factor remains whether an individual ceased to be ordinarily resident in the Republic.

Two separate processes, routinely treated as one:

Completing the first does not accomplish the second. Somebody who "financially emigrated" years ago and assumed their South African tax obligations ended may still be a South African tax resident — and a resident is taxed on worldwide income.

Nor is it about citizenship. SARS: "citizenship is one of the indicators that may point to someone being ordinarily resident, but that is not conclusive." Keeping or renouncing a passport does not settle it.

And you have to tell SARS

Asked whether you must notify SARS if you cease to be a tax resident, the answer is a single word: "Yes."

The notification happens either through the wizard on the income tax return — which asks whether you "ceased to be a tax resident", with the date — or when applying for a tax clearance certificate via eFiling on emigrating with the intention of ceasing to be ordinarily resident.

It is not automatic, and nobody does it for you.

We can give you one of the two residency tests, not both

SARS says a person is a tax resident if they are ordinarily resident or become resident by way of physical presence, and points to Interpretation Notes 3 and 4 for the tests.

We have since read Note 4, and the physical presence test is set out in full in the 91/915-day rule — all three thresholds, the part-day rule, and the 330 days it takes to cease.

Note 3 we have not read, and that is the gap that matters here. "Ordinarily resident" is a facts-and-circumstances test, SARS states that it supersedes the physical presence test, and it is the one most people leaving South Africa actually turn on. So the day counts will not, by themselves, tell you whether you are still resident — and that remains the single most consequential question on this page.

So what does apply to a self-employed remote worker?

We are not going to answer that with anything we did not source, which means the honest answer is short.

If you are a South African tax resident, you are taxed on worldwide income. The section 10(1)(o)(ii) exemption is for employment income and excludes the self-employed by name. Whether any other relief helps you — the section 6quat credit for foreign tax paid, a treaty, or the way your business is structured — is a question for a cross-border tax practitioner, and it depends on facts a web page does not have.

What we can say usefully is what to stop assuming:

• Do not assume the R1.25 million exemption covers freelance income. SARS names independent contractors as excluded.
• Do not assume a foreign client makes income foreign-sourced for these purposes. The days test is about where you are.
• Do not assume financial emigration ended your tax residence.
• Do not assume paying tax abroad settles it. Above the cap, SARS says the excess is taxable "irrespective of whether tax is paid in another country".

Each of those is a specific, quotable statement from SARS, and each is commonly believed in the opposite direction.

The money that leaves before tax does

One thing worth checking regardless of your tax position, because it is entirely within your control: what it costs to get paid.

Across both major corridors into South Africa the surveyed spread ran from about 2% to nearly 13% of the amount transferred. On a full-time foreign income that difference is far larger than most tax planning at the margin, and it recurs every month. We have priced every provider from the UK and from the USA, and written about getting paid by US clients specifically.

A note on the source's age

The SARS FAQ this page quotes is the 3rd issue, dated 17 March 2020. The R1.25 million cap and the days test are quoted as published there.

Tax figures move. Confirm the current position with SARS or a practitioner before relying on any number here — particularly the cap.

This page reports what SARS published. It is not tax advice, and the questions it declines are declined because getting them wrong is expensive.

How does this affect YOUR Money OS?

Believing an exemption applies when it does not is the kind of error that compounds silently for years and then arrives as an assessment. One conversation with a practitioner settles it.

Check my free OS score

FAQ

Does the R1.25 million foreign income exemption apply to freelancers? No. SARS states that independent contractors and individuals who are self-employed do not qualify, because they are not in an employment relationship. The exemption is for employment income.

I work remotely from South Africa for a foreign company — am I exempt? Almost certainly not. The exemption requires services rendered outside South Africa, and the qualifying test measures where you physically are: more than 183 full days outside South Africa in a 12-month period, including a continuous period exceeding 60 full days.

What is the foreign employment income exemption limit? R1.25 million from 1 March 2020. Remuneration above that is subject to normal South African tax, irrespective of whether tax is paid in another country.

Is there an "expat tax" in South Africa? SARS says no: "there is no new 'expat tax' introduced." The requirements did not change in 2020 — a cap of R1.25 million was added to an exemption that already existed.

Does financial emigration end my South African tax residence? No. SARS says emigration for exchange control purposes is not connected to tax residence and does not automatically break it. The deciding factor is whether you ceased to be ordinarily resident.

Does giving up South African citizenship end tax residence? Not by itself. SARS says citizenship is one indicator of being ordinarily resident but is not conclusive.

Do I have to tell SARS if I stop being a tax resident? Yes. Through the wizard on the income tax return, which asks whether you ceased to be a tax resident and on what date, or via a tax clearance application on eFiling.

What if I work partly in and partly outside South Africa? The income is apportioned, and only the portion for work days outside South Africa during which services were rendered can be exempt.

Related

• How to get paid from the USA to South Africa
• Retiring in South Africa: the R37,000 rule
• Is South Africa a high-tax country?