AUTHOR │ Hugo van Zyl CA(SA) TEP MTP(SA), Director: Taxforum @Wegkaner

SA-resident expats are facing an August 2020 provisional tax conundrum, and possibly an unnecessary cash outflow, much sooner than they expected. For most, the first provisional tax should be a nil return, and very few expats expect to pay a refundable provisional tax

First provisional tax liability is based on a full tax year’s taxable income, that is, only one half of the capped exemption can be claimed for the first period. However, for PAYE, employers are allowed to deduct the entire exemption in the first few months, resulting in no or little PAYE claimable in the first provisional tax period. Despite using the basic amount, taxpayers may only claim actual PAYE suffered in the first six months. For most the result is an artificial provisional tax payment later, which is to be refunded on assessment.

Based on the Naspers unbundling experience, SARS has both the appetite and the ability to challenge taxpayers filing a nil provisional tax return, based on last assessed or basic amounts.

Non-resident expats do not pay provisional tax on foreign employment income.

As of 2021 tax year, the previously unrestricted foreign employment income exemption (FEIE) is limited to (or capped at) R1,25 million per tax year (refer to Interpretation Note 16 Issue 3 and the SARS Frequently Asked Questions publication dealing with FEIE in 2021 tax year).

Treasury made it abundantly clear that they expect significant tax inflow because of the capped or restricted exempt value, or as social media refers to it: #ExpatTax. Although SARS denies that this is a new tax on expats, we shall refer to the tax on foreign-earned income of more than R1,25 million as ‘expat tax’.

Naspers’ corporate restructuring gave SARS the opportunity to show its muscle to collect provisional tax on the first provisional payment. The basic amount is no safe harbour for SARS-targeted taxpayers, and expats are an easy category of taxpayer to target. Owing to expat tax changes, it is common knowledge that the 2019 (last assessed) taxable income will not be the 2021 forecast. Despite having a South African employer, SARS can deem the employee with no other taxable income a provisional taxpayer.

Paragraph 17(5) of the Fourth Schedule to the Income Tax Act provides that SARS may after ‘taking into account any … factors having a bearing upon the probable liability of taxpayers for normal tax, prescribe tables for optional use by provisional taxpayers falling within any category specified by the Commissioner’. To date, less than four weeks before the calculations are due, no such announcement has been included in the final External Provisional Tax Guide (version 21 for 2021 tax year).

Interpretation Note 1 Issue 3 (IN1) was last updated in February 2019. Unfortunately it was not updated following the introduction of the capped FEI exemption.

IN1 states clearly that the reliance on a nil ‘basic amount may or may not fulfil this [obligation under the Fourth Schedule’s paragraph 19 is to submit an estimate of the total taxable income for the year of assessment] … depending on the facts of the particular case. For example, if a provisional taxpayer realised a capital gain during the current year, the use of the basic amount is likely to be inappropriate if the capital gain is significant.’

For expats that had all their foreign employment income tax-exempt in 2020, and especially 2019 tax year (being the last assessed tax year), the August 2020 estimate will probably reflect a nil or very low estimate.

It is submitted that where an expat knows their estimated taxable income for the 2021 tax year will be substantially higher, the basic amount could fail to fulfil the compliance obligations facing expats. One also has to consider the C: SARS paragraph 19(3) rights to increase the basic amount once the IRP6 is filed.

Expats that have no trade income and no rental income and earn interest below R23 800 can also escape the provisional tax payment, provided that South African PAYE is deducted and SARS has not told the expat that he or she is a provisional taxpayer.

How should the IRP6’s taxable income for the entire tax year be calculated?

‘Taxable income is equal to gross income less exempt income less all amounts allowed to be deducted or set off plus all amounts included or deemed to be included in taxable income under the Act, for example, the amount of taxable capital gains. An estimate must include taxable capital gains made or that are anticipated to be made during the year of assessment. This includes situations where, in the first period, there is a reasonable expectation that a taxable capital gain will be made during the second period.’

The fact, that it is the provisional tax due and that is divided by 2 is the root cause of the issue at hand.

Reading the Frequently Asked Questions document issued by SARS, question 34 deals with the PAYE rules. It is submitted that the C: SARS (probably unintendedly) created an artificial mismatch between the provisional tax due and PAYE available for the deduction because FAQ 34 has not been extended to para 17(5) (Fourth Schedule) provisional tax adjustment.

By using a simple example, the writer wishes to highlight and justify an urgent amendment to paragraph 17(5) of the Fourth Schedule C: SARS notice guiding provisional expat taxpayers to overcome unintended hardship and unnecessary tax refunds on assessment. For the 2021 tax year most will avail themselves of the low basic amount, but as from the 2022 tax year, the benefit will be lost.

The #ExpatConundrum is best explained by way of an example:

The expat is a tax resident seconded from SA by a local employer to a foreign country where he pays 10% tax (flat rate) deducted from the foreign payroll. Not having worked a single day in SA, his March to December 2020 foreign employment income totals R2 million. During January to February 2021, he works in SA earning another R400 000 − that is, his gross annual employment income equals R2,4 million. No part of the FEI fails the physical days outside SA test − that is, the March to December 2020 days in SA were limited to annual leave. His annual balance of remuneration may therefore be reduced by R1,25 million FEIE, and an IRP3(q) was issued to his employer.

Based on the above facts, the PAYE records can be simulated and summarised as follows:

As can be seen, no PAYE will be payable in the first six months. Above is the SA payroll: the actual foreign tax paid must therefore be reduced proportionally in respect of the exempt R1,25 million.

The expat’s provisional tax returns should then be filed as follows:

The overpayment risk is R184 601 or 25% of the taxable foreign employment income (184 601/[2 000 000 − 1 250 000] = 184 601/750 000).

In conclusion, whereas the tax obligation on assessment would be R56, the expat obliged to file provisional tax returns will substantially overpay provisional tax. For the tax year 2021, the basic amount will no longer be zero, resulting in an unnecessary over-collection of tax from an already aggrieved class of taxpayers.

A taxpayer may only claim actual PAYE suffered in the first six months, leaving most resident expats with an artificial liability which will only be refunded 19 months later on assessment