Tax in South Africa

Individuals resident in South Africa are subject to tax on their worldwide income. Non-residents are subject to tax on income from a South African source or from a source deemed to be South African.

The source of remuneration usually relates to the rendering of services, and is generally the location those services were rendered. In practice, short-term visits of fewer than three weeks do not generally result in South African tax liability if the individual’s presence in South Africa is incidental to continuing employment elsewhere and if the income falls below the annual tax threshold. Under existing law, income tax becomes payable if an individual earns more than ZAR 83,100 per year (2021 tax year).

An individual is regarded as a resident for tax purposes under either the ordinarily resident rule or the physical presence rule.

Under the ordinarily resident rule, an individual is regarded as resident in South Africa if South Africa is the place, considering all personal and financial circumstances, to which the individual would naturally return from his or her travels, and that is the individual’s real home.

The physical presence rule applies if the individual is not ordinarily resident at any time during a particular year, but is physically present for more than 91 days in the relevant year and is physically present for an aggregate of more than 915 days in the preceding 5 years (that is, effectively an average of 183 days per year) and for a de minimis period of more than 91 days in each of those preceding years. For purposes of determining the 91-day and 915-day periods, a partial day counts as a full day. If an individual is physically outside South Africa for a continuous period of at least 330 full days after the day of last physical presence, under the physical presence rule that person is not resident for the entire period of continuous absence.

A person cannot be treated as a South African resident for tax purposes if he or she is considered to be a resident of another country under the 'tiebreaker' rules of a double tax treaty applicable to the relevant income item.

Employment income - The basis of employee taxation is remuneration, which consists of salary, leave pay, allowances, wages, overtime pay, bonuses, gratuities, pensions, superannuation allowances, retirement allowances and stipends, whether in cash or otherwise. These payments, together with the cash value of any fringe benefits received, form part of the gross income of an employee. Fringe benefits are taxed in accordance with a schedule of valuations.

Remuneration from employment on extended absences outside South Africa is exempt from tax if the employee is outside South Africa for an aggregate of more than 183 full days in any 12-month period and for at least one continuous period exceeding 60 full days during the same 12-month period.

From 1 March 2020, only the first ZAR1.25 million of remuneration with respect to foreign services rendered will be exempt from tax under the foreign employment income exemption. A foreign tax credit can be claimed for foreign taxes paid on foreign employment income in excess of ZAR1.25 million.

Effective 1 March 2017, residents do not qualify for an exemption where a lump sum, pension or annuity is received or accrues from a South African retirement fund, regardless of whether services are rendered outside South Africa. In order for such income to qualify for the exemption, the resident must have rendered services outside South Africa and the lumps sum, pension or annuity must be received or accrued from a foreign retirement fund.

Self-employment and business income - Professional fees paid to non-residents are subject to employee withholding tax (if from a South African source), even if the non-resident is an independent contractor.

Business losses of a self-employed person may be carried forward indefinitely if the trade is continued. No loss carry backs are permitted.

Investment income - Foreign dividends on holdings of less than 10% that are paid to residents are taxable, subject to the provisions of an applicable double tax treaty. Credit for foreign tax paid may be available. Foreign dividends paid on greater holdings are exempt. The exempt portion of the dividend is determined by a factor that results in a maximum tax rate of 20%.

Domestic dividends are subject to a final withholding tax of 20%.

Royalties paid to non-residents are subject to a final 15% withholding tax.

For residents, South African-source interest up to a cumulative ZAR 23,800 (ZAR 34,500 for individuals older than 65 years of age) is exempt from normal income tax. Foreign-source interest is subject to income tax.

Non-residents qualify for a specific exemption from normal income tax on their South African-source interest if they are physically absent from South Africa for a period exceeding 183 days and if they do not carry on business in South Africa (employment is not a business for these purposes) at any time during the 12-month period preceding the date on which the interest is received by or accrued to that person.

A final withholding tax of 15% is imposed on South African-source interest paid to non-residents, subject to a reduction in the rate in accordance with double tax treaties.

Anti-avoidance legislation restricts spouses from splitting their investment income to reduce their tax burden.

Taxation of employer-provided stock options and other incentive plans - The difference between the market value of shares and similar rights as of the date of vesting for tax purposes and the consideration given by the employee is taxed in South Africa if, in the case of non-residents, the incentive is related to services rendered in South Africa. Residents are taxable on the whole gain, regardless of source, unless they are exempt under foreign employment income exemption. Any subsequent gain on actual disposal is generally subject to capital gains tax (CGT). However, if the resident is classified as a share dealer, the gain is subject to income tax instead of CGT.

Non-residents are subject to income tax on that part of the gain that relates to the period of South African service. Non-residents are generally not subject to CGT on any subsequent gain on actual disposal. However, if a non-resident employee is classified as a share dealer, the gain is subject to income tax.

Capital gains are taxable in South Africa. Capital gains tax (CGT) is imposed through the income tax system by including a proportion of the calculated gain in taxable income. For residents, CGT applies to capital gains derived from the disposal of worldwide tangible and intangible assets.

Non-residents are subject to CGT on capital gains derived from the disposal of real estate held directly or indirectly through a company or trust (if 80% of the value is attributable to real estate), or the assets of a permanent establishment in South Africa. A deemed capital gain arises on the loss of tax resident status.

For individuals, a ZAR 40,000 annual exemption of capital gains or reduction in capital losses is allowed. Only 40% of capital gains (after the exemption) is taken into account for CGT purposes. Consequently, the effective CGT rate for an individual taxed at the highest marginal income tax rate of 45% is 18% (40% x 45%).

CGT applies only to increases in value occurring on or after 1 October 2001, and a formula calculation or a formal valuation is used to determine the base value at that date. Inflation indexing of base cost is not allowed. Rollover relief is available in certain circumstances, including the destruction or scrapping of assets. A gain derived from the sale of an individual’s primary residence is not subject to CGT unless the amount of the gain exceeds ZAR 2 million.

Capital losses, other than those incurred on the disposal of personal-use assets (assets used primarily for purposes other than the carrying on of a trade), may offset capital gains. However, net capital losses may not be offset against regular taxable income. Excess losses may be carried forward indefinitely to offset future gains (subject to the ZAR 40,000 annual reduction, which is discussed above).

Estate duty and donations tax are levied at a flat rate of 20% on net assets at death and all capital transfers concluded for no consideration or for inadequate consideration.

Effective from 1 March 2018, a rate of 25% applies to donations exceeding ZAR 30 million and on estates for which the dutiable amount is more than ZAR 30 million.

Exemptions from donations tax are granted for donations of up to ZAR 100,000 made each year during a person’s lifetime. A deceased’s estate is subject to duty only to the extent that the net value exceeds ZAR 3.5 million (or ZAR 7 million for a married couple).

Residents are subject to estate duty and donations tax on worldwide assets, except for offshore assets acquired by inheritance or donation from a non-resident or owned prior to becoming resident. To prevent double taxation, South Africa has entered into estate tax treaties with 6 countries.

Non-residents are subject to estate duty on assets located in South Africa only and are exempt from donations tax.

Transfer duty is levied on the acquisition of fixed property with a value exceeding ZAR 1 million. The rate of the duty on property with a value exceeding ZAR 1 million depends on the purchase price of the property; the maximum rate is 13% which applies to property with a value exceeding ZAR 11 million. If the purchase price is less than the property’s fair value, the tax authorities may calculate the amount of transfer duty payable based on the fair value.

Limited unemployment insurance and accident or illness benefits are provided.

The Unemployment Insurance Fund provides benefits to unemployed people and to dependants of deceased contributors. Employers and employees each contribute to the fund at a rate of 1% of the employee’s remuneration up to a remuneration limit of ZAR 14,872 per month.

Employers are required to contribute to the Skills Development Levy fund, which was set up to encourage learning and development in South Africa. They contribute 1% of the employer’s salary bill. The funds are used to develop and improve skills of employees.

Contributions to the Compensation Fund are payable on annual remuneration of up to ZAR 484,200 for the period 1 March 2020 through to 28 February 2021.

Under the Pay-As-You-Earn (PAYE) system, resident employers or agents for non-resident employers must deduct tax each month from the remuneration of their employees, which must be paid to the South African Revenue Service. If a non-resident employer does not have a place of business in South Africa or an agent who is authorised to pay remuneration, no PAYE liability is likely to arise.

Persons deriving income (excluding exempt income) of ZAR 30,000 or more a year from sources other than remuneration, or having taxable income in excess of the tax threshold, are considered provisional taxpayers. They are required to make provisional tax payments each year on 31 August (first payment) and in the following year on 28 February (second payment) and 30 September (third payment).

If an individual (resident or non-resident) earns less than ZAR 500,000 during a tax year, he or she is not required to file a tax return (subject to certain conditions).

In the absence of treaty provisions, unilateral relief (in certain circumstances) is available on foreign-source income in the form of a credit for foreign taxes paid, limited to the lesser of the actual foreign tax liability and the South African tax payable on the foreign income.

South Africa has entered into double tax treaties with 79 countries.

South Africa is also negotiating tax treaties with a further 8 countries.

In addition, many treaties are being renegotiated by way of protocol to deal with South Africa’s new dividend and interest withholding tax regimes.