AUTHOR: TATTON BOURAS
It has become a common career path for South Africans to travel abroad and work on yachts, earn foreign income and still be a tax resident of South Africa. However, many “yachties” still do not understand whether they must pay tax to the South African Revenue Service (“SARS”) and if so, how much they ought to pay.
As a general principle, South African tax law requires that South African residents must pay tax on all income, including income earned abroad. Notwithstanding this, there are circumstances where a person may not be taxed on their income which has been earned abroad.
One circumstance is in terms of section 10(1)(o)(ii) of the Income Tax Act No 58 of 1962 (“the Act”). This section sets forth that a South African tax resident will be exempt from paying tax on income earned abroad if:
- the remuneration qualifies for the exemption and is considered as “gross income”, for example salary pay;
- the remuneration is paid for services rendered, and so termination pay is not included;
- the employee is outside South Africa for more than 183 days in aggregate during any 12-month period, and is employed during that time;
- out of the 183 days or more of the aggregate period, it includes a continuous absence of at least 60 full days;
- and the services are rendered during the periods of absence from South Africa.
Considering the above, the person must be earning income while employed and rendering services outside South Africa for more than 183 days, of which 60 days must at least be continuous, during any 12-month period. However, there is a limitation imposed on the application of section 10(1)(o)(ii) of the Act, as it only applies in respect of remuneration earned up to R1.25 million. Thus, any foreign income earned above R1.25 million will then be subject to tax.
Another circumstance is in terms of section 10(1)(o)(i) of the Act and specifically applies to yachties. Section 10(1)(o)(i) cascades into two different exemptions which are set forth under section 10(o)(i)(aa) and section 10(o)(i)(bb).
Section 10(1)(o)(i) of the Act states that a South African tax resident will be exempt from paying tax on income earned abroad if:
- in accordance with section 10(1)(o)(i)(aa), the remuneration has derived from a person who is an officer or a crew member of a ship engaged in the international transportation for reward (commercial purposes) of passengers or goods;
- or in accordance with section 10(1)(o)(i)(bb), the remuneration has derived from a person who is an officer or a crew member of a ship engaged in the prospecting, exploration or mining for or production of any minerals (including natural oils) from the seabed, and where such officer or crew member is employed solely for the purposes of the passage of such ship;
- and a person who is outside South Africa for more than 183 days in aggregate during any 12-month period.
SARS issued an interpretation note on 2 February 2017 regarding section 10(1)(o)(i) and its application. The interpretation note unpacks the wording of this section, and the circumstances in which it would apply. The interpretation note deals with, inter alia, the following terms:
- “derived”;
- “reward”; and
- “passage”.
The first key term is “derived”, both exemptions under section 10(1)(o)(i) of the Act applies when remuneration is derived from one of the exemptions. The Act does not define the word “derived”. However, the interpretation note sets forth that there must be a connection between the remuneration received and the person’s role as an officer or crew member on the ship. In other words, the remuneration received by the person must be as a result of his/her employment as an officer or crew member on the ship.
The second key term is “reward”, the exemption under section 10(1)(o)(i)(aa) refers to this term and specifically states that the exemption only applies if the ship is engaged in the international transportation of passengers or goods for reward. The interpretation note explains that the ship must receive compensation for such transportation and mentions cruise ships, passenger liners and cargo ships travelling in international waters as examples of same. In essence, for the exemption to apply the business of the ship must be to “transport”.
The third key term is “passage”, the exemption under section 10(1)(o)(i)(bb) refers to this term, and specifically states that the ship must be engaged in the prospecting, exploration or mining for any minerals but that the officers and crew members who are employed on the ship, must be employed for the purposes of passage. The interpretation note reiterates that the term “passage” in this context means the navigation of the ship. Thus, the exemption will only apply to the officers and crew members who are employed for the navigation of the ship and not for any other purpose.
Considering the above, a yachtie will be exempt from paying tax on remuneration received if he/she receives such remuneration from being employed in respect of a ship. However, such ship must either be engaged in the commercial use for the passage of persons or goods or must be engaged in the prospecting, mining or exploration of any minerals, and such employment in that instance must related to the navigation of the ship. Notwithstanding this, in either case, a yachtie will have to fulfil the days requirement. By this we mean that a yachtie must be outside of the Republic for at least 183 full days during the year of assessment. The interpretation note specifies that a “full day” means 24 hours, but that the days do not have to be consecutive or continuous but that a total of 183 full days in aggregate during a year of assessment must be exceeded. In addition, the calculation of the days are calendar days.
Thus, yachties who fall into the two exemptions under section 10(1)(o)(i) described above, and who meet the days test will be exempt from paying tax on their remuneration. Notwithstanding this, this will not apply to remuneration received from other sources such as investments and the like.
The issue has been raised regarding yachties who are employed on ships which are for the owner’s private use versus those who are employed on ships used for charters. Considering the above, it is clear that yachties who are employed on ships used for charters could argue that they fall under section 10(1)(o)(i)(aa) of the Act, as they are employed on a ship whose business is to transport passengers and are rewarded for same. However, those yachties who are employed on ships which are for the owner’s private use may have a more difficult time arguing that they qualify under section 10(1)(o)(i)(aa). This is because although the ship is transporting passengers (the owner and his/her guests), the ship itself is not doing it for a reward, and it does not operate as business for transportation. Thus, those yachties who are employed on ships which are used for the owner in his/her private capacity, would be more successful in applying for an exemption under section 10(1)(o)(ii) and would then be subject to the cap of R1.25 million. However, if the circumstances were that the owner of the ship did use the ship for commercial purposes from time to time, the yachtie may be able to claim the exemption under section 10(1)(o)(i)(aa), but a proper analysis of the facts would have to be conducted.
Whether or not a yachtie must pay tax is entirely dependent on the circumstances of his/her employment. In addition, a yachtie would only be entitled to the exemptions if he/she is employed and thus if the yachtie is an independent contractor or working temporarily, he/she will not qualify. It is important for any South African pursuing the yachtie career path to understand their tax position to avoid adverse tax consequence such as tax penalties and even prosecution.
Tel:+27 31 570 5336email: tatton.bouras@gb.co.za