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Nine key considerations to give you maximum tax saving when you sign on an expatriate

by , 02 June 2015
We're suffering a severe skills drought. Everyone is complaining about how hard it is to find and keep good, skilled staff, and I've no doubt you find yourself in the same boat.

The short-term solution is to search for skills abroad. The problem is expatriates don't come cheap.

Here are nine points to consider to guarantee that your recruitment efforts are cost effective and compliant with tax laws.

1. Make sure your expats are non-resident for tax purposes

Non-residents are taxed on their South African source income only.

Maintain your expatriate's non-resident status by offering a fixed term contract of less than five years. Don't let him stay here permanently either.

If he wants to become a permanent resident, change his contract so you're employing them as a local.

2. Relocation Allowances

When Paddy relocates here, you can pay relocation related expenses on his behalf which are exempt from tax. Make sure this is written into his agreement from the start.

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3. Go the travel allowances route

Work out the potential tax saving on offer if you give Paddy a travel allowance.

Contractually ensure that Paddy isn't responsible for the car should he be recalled home on short notice so that the business risk of the car remains with the company.

4. A company car for the wife seldom makes sense

If Paddy wants a company car for this wife, think twice before agreeing. A second company car will not have any business travel on it, and therefore the fringe benefit will be fully taxed.  

5. Residential accommodation

If you give Paddy residential accommodation, it's exempt from fringe benefit tax for the first two years. However, this only applies where the cost or determined value isn't more than R25 000 per month.

Rather provide accommodation than pay allowance. Allowances are fully taxable.

For example, you give Paddy a R20 000 accommodation allowance and expatriate accommodation of R12 000 per month. The allowance is taxed at 40%, leaving Paddy with R12 000 to pay the rent (R20 000 - 40% tax = R12 000).

If you give Paddy accommodation directly, you only pay R12 000… and for the first two years there's no fringe benefit tax.

After the two honeymoon years, the accommodation becomes taxable. Calculate the fringe benefit payable on the highest actual rent.

For example, you decide to give Paddy accommodation directly, and after two years you must work out what fringe benefit must be paid on the highest actual cost (R12 000).

6. Loans for furnishing are NOT a good idea

You might be asked to give your expatriate a loan to buy appliances, curtains, furniture, etc. for his accommodation.

If you decide to do this, make sure this loan is repaid. It you don't, you face a double tax hit. First, you'll pay low interest tax on the outstanding monthly balance. Second, a fringe benefit tax becomes payable when the loan is written off.

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7. SARS knows about the standard expatriate earnings items

Make sure you correctly disclose all Paddy's earnings. This includes any home country payments for work done here.

Several common – and taxable – allowances and benefits you provide to your expatriate employees include cost of living and hardship allowances, foreign location premiums, spouse allowances and South African school fees.
 
8. Subsistence

Expatriate employees don't qualify for subsistence allowances. They're not resident for tax purposes and so don't have a usual place of residence in South Africa.

Local subsistence allowances are fully taxable.

A subsistence allowance you give Paddy for days he works outside South Africa is exempt from tax. Structuring subsistence allowances for your expatriates isn't necessary.

9. Air travel

Paddy and his family's travel into and out of South Africa is tax exempt.

However, home leave during the fiscal year is taxable.

Most expatriate agreements determine that you'll pay for Paddy and his family to go home at least once a year. When you do this, make sure you can prove that Paddy is going overseas on business and that his family is accompanying him. If you can't prove this, fringe benefit tax becomes payable.




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