overseas tax exemption to be broadened   
29 October 2007

Proposed amendments to the Income Tax Act would deal with the anomalies relating to deferred compensation and better define what amounts were to be exempt, Samantha Grobler, a senior manager of international assignments at PricewaterhouseCoopers, said.

“Many companies are moving towards share-based payments, even for employees working abroad for a period of time, so these changes are most relevant and welcome,” Grobler said.

South African tax residents working overseas enjoy an exemption from tax for remuneration received for foreign services provided that they are outside of the country for more than 183 days (of which 60 are consecutive) in a 12-month period.  The existing 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 three-year to five-year, qualifying period, Grobler said. “So even if the services were rendered outside of SA for most of the three- to five-year period, the exemption would not apply to the whole amount as the exemption legislation only looks 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, she said. However, this would be clarified by the proposed amendments to section 10 (o) (ii).

The wording of the exemption had been amended and had a broadening effect such that deferred compensation if earned in a qualifying period (although not accruing for tax purposes in that period) would be exempt when it accrues in any tax 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 was that amounts qualifying for exemption had been redefined.

“The exemption was previously applicable to remuneration as strictly defined in the fourth schedule (of the act).” For instance, 40% of a travel allowance received by a South African resident working abroad would not have fallen into the exemption.

However, 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 under section 8C (share option gains).

Grobler said that the 40% travel allowance would now qualify for the exemption.

Another possible benefit from the proposed 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 that they earn.

Sanchia Temkin, www.businessday.co.za