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Tax Bills propose additional exit tax on emigrating South Africans

National Treasury published the latest Draft Tax Bills on July 28.
Image: Shutterstock

National Treasury published the latest Draft Tax Bills on 28 July 2021, which incorporate the tax proposals made in the 2021 Budget. The Draft Taxation Laws Amendment Bill (TLAB) contains a particularly jarring amendment which proposes to tax retirement fund interests of individuals when they cease South African tax residency.

Existing exit tax

It is important to note that the Income Tax Act No. 58 of 1962 (the Act) already makes provisions for an exit tax where a person ceases their South African tax residency. The Act creates a fiction whereby a person who ceases residency is treated as having disposed of their assets (other than immovable property situated in South Africa) at market value, triggering a tax liability. But this section does not apply to interests in retirement funds.

Proposed amendment

The TLAB proposes, in addition to the existing exit charge, to tax the value of the interest in a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.

It is proposed to create a similar fiction under a new section in the Act where an individual will be deemed to have withdrawn from their retirement fund on the day before they cease residency. However, payment of the tax will be deferred until the amount is actually receivable from the fund. The tax will be levied on the value of the interest on the day prior to ceasing residency and will be calculated in terms of the lump sum tax tables prevailing at the time of payment.

In other words, the tax is triggered when the person ceases residency but only becomes payable when the amount is actually withdrawn. It seems Government recognises that this measure of relief is necessary, as it would have been burdensome to pay both exit charges concurrently.

Reason for change

Since retirement interests are not subject to the existing exit charge, Sars might lose the right to tax retirement interests when they are withdrawn after a person ceases residency but prior to retirement. If a person becomes resident of a country with which South Africa has concluded a double tax treaty, generally, such treaty will give the sole taxing right to that country. By the time the amount is withdrawn, South Africa will no longer have the right to tax that amount.

In other words, the discrepancy between the date of cessation of residency and the date of withdrawal means Sars loses out on the right to tax the retirement interest. This mismatch is exacerbated by the law change that phased out the concept of emigration for exchange control purposes (commonly referred to as “financial emigration”).

Previously, individuals could withdraw their retirement interest immediately upon completing the financial emigration process. This date would generally align with the date of cessation of residency, thereby avoiding the anomaly. Under the new dispensation, a person will only be allowed to withdraw their retirement interest after being non-resident for three consecutive years. The amendment effectively legislated the mismatch in timing, resulting in the prevalence of these cases and necessitating a further law change.

Closing comment

This interesting development would, in effect, constitute a treaty override measure put in place by South Africa to avoid the further loss of tax revenue as a result of the large number of individuals ceasing their tax residency in South Africa. This is just one of the cascading effects of the widely opposed decision to dispense with the financial emigration process.

Jean Du Toit, Head of Tax Technical at Tax Consulting South Africa.

COMMENTS   59

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We are being forced into adopting the Gupta way of emigration !!!!

Really scraping the bottom of the barrel now.

Tax you to death if you stay, tax you to death if you emigrate.

You are bad at tax.

Yet you live there.

The Trick is to steal enough first( actually bankrupt a country ) … GuptaStyle!

> We are being forced into adopting the Gupta way of x

Reflect carefully on your own words, my friend, that man’s instinct to tribalism and selfishness doesn’t cloud your moral judgement and that you too don’t become part of the problem.

Let’s get some more clarity before working ourselves into a frenzy. How about a journalist writes an article?

Try reading the above article again. (shaking my head)

You are bad at tax.

Yep

It does not help that this article calls deemed disposal rule an exit tax. The alternate would be that the departing family’s assets stay SA domiciled and gains are realized when they are actually sold. Admin nightmare and in most cases the departing people anyways sell their local assets.

They should make a kommando taktikal taks

They should make a kommando taktikal taks

The avarice of the regime knows no bounds. They are shameless. This will simply exacerbate capital and skills flight.

Yet you live there.

Do you call this living? Private medical, security, transport and insurance required. Cost of living very high, sky high crime, SAPS useless, broken SOEs, electricity cuts, highest youth unemployment in the world, lowest math’s marks, lousy returns on the JSE. BEE stealing, looting by thousands, corruption and inefficiency.

I call it surviving in a third world dump!

FLEE THE FAILED STATE!

The Tyranny of the Majority is a 19th century quote, yet so very real in todays 21st century. There is such panic going on in the ANC that common sense simply ceases to exist with them. The 16 tax payers left in SA will soon be zero.

You see when you have a country that’s dead As* broke they will continue to BLEED the tax payers until they break their back!! Get ready for More, More, & More “NEW AND IMPROVED” taxes. Taking the country right down the drain. Junk, Junkier, JUNKIEST!! Thank you A.N.C.

It’s looks like legalised looting.
You want us to stay but you can’t guarantee our safety.

SARS has turned into a cursed parasite sustaining a cursed criminal regime voted into power by a cursed people.

Kieswetter, Mboweni and Gordhan: the respectable faces of corruption. Their duties are to fool the gullible analysts and media and to ensure their party has enough to steal.

Reserve bench (impact player): Shamila Batohi

The ANC does stupid rather well.

Young people will leave as soon as they can rather than work in SA and build up retirement savings only to have them decimated. Rather work in a country which allows for safe accumulation of wealth. This means earlier loss of desperately needed skills.

What is next?…..reintroduction of Exchange Control. The single most telling indication of a failed state

As per the comment above it is only stupid in terms of SA’s economy and people; not the ruling ANC regime elites. They need the money!

All this amendment appears to do (the devil is in the details) is put an emigrant in the same position as a resident who withdraws from a retirement fund on change of employment. If you withdraw before retirement, you get taxed. Nothing new or unfair in that.

What isn’t clear from the article is what happens if an emigrant preserves his/her SA fund until ‘retirement’ at age 55, which you would almost certainly do if you emigrate at 50+, since you have to wait three years anyway.

I’m not sure why you think it’s ok for the government to have even more oversight and rules around your personal finance.

I am fine with the concept. It is complete nonsense that Johnny gets 35 years of tax deductions in SA, becomes a Maltese, and then pays no tax on his pension.

I agree. Even the exit tax is appropriate – and on your worldwide assets – or else a Saffer emigrating to the UK ends up ultimately paying it to Her Majesty’s government when he dies.

Exit tax is really just paying your accrued estate duty. Then, the death tax you pay in the UK when you eventually die is only the balance.

Seems entirely fair really.

Your taxes in SA are exhorbitant and what do you get for it?

1. I get no pension from the regime
2. I get no medical from the regime
3. I get told I am too white for many jobs
4. I pay more than most in the EU for income tax
5. I get crumbling infrastructure

When this regime actually deserves my money then you can talk. Until then, keep quiet

Yes sir, no sir, three bags full sir

You know you get tax deductions on the things they are proposing to tax if you leave? So what are you moaning about? You are bad at tax.

You know you get tax deductions on the things they are proposing to tax if you leave? So what are you moaning about? You are bad at tax.

It bothers me that people like you think this is ok.

We should be arguing for less tax all the time. Full stop.
Which necessarily means smaller government and efficient government – both of which we are miles away from (which also means a ton of easy improvement if anyone actually wanted it).

So glad I stopped using retirement funds about 15 years ago

Never looked back

This just reinforces that I made the correct decision

Why? Are you leaving SA? Didn’t think so.

Why? Are you leaving SA? Didn’t think so.

Do you always immediately answer your own questions with incorrect assumptions?

I am leaving SA yes.

Why emigrate officially? Don’t most people just leave?

The formal legal concept of Financial Emigration was scrapped (and there were lots of scare stories on Moneyweb when it happened, mostly from people who earned fees from processing Financial Emigration). I’m not sure if this is a sequel to that genre or a genuine issue. Regardless, everyone now “just leaves”: there is no more concept of “formal” emigration.

“The formal legal concept of Financial Emigration was scrapped…”

First mention of this I have read
…didn’t the government want investments to remain in RSA, that dividend tax collected was the point of financial emigration

Just querying..

But you can’t just “leave”. If you mean that you physically leave but remain a SAn for tax purposes then you will continue to have to render a tax return and be subject to tax on your worldwide income.

If you indicate on your tax return that you have left, you are liable to the exit tax (ie CGT, effectively accrued estate duty as you exit the SA system as if you were dead).

If you just stop filling in a tax return you run the risk of SARS coming after you wherever you are. This is a risk that might not be worth taking – I certainly wouldn’t want to spend the rest of my life somewhere else worrying about SARS outsourcing it’s collection to a foreign law firm, with interest and the risk of penalties compounding all the time.

Another sign the regime is close to bankrupcy.

You will soon need to get an exit visa reminiscent of the USSR. You have been warned! Get your money out before it becomes Zimbabwe 2.0

Yet you live there. Can’t take the big talk and no action seriously.

Yet you live there. Can’t take the big talk and no action seriously.

I bet money you have some mental diabolical. Money that has solemnly sworn to rid you tyrants of all nonsensical archetypes. If I had a taktikal I would sit on it. See to it that most of you jaded heathens are burned at the cross for no more lesions of the mind. I have so far denounced that which has attached itself to purposeful meaning. Your jargon is half-handed and loose to goose. When all is said and done there is easily enough to go around, let alone a life waster of a videogame.

Are you drunk?

Yes.

Might miss school as well with a nice babbalas!!

Why do the zealous cencors not block this Bib/Biiby’s comments completely? Not only nonsensical, but posted twice as well. Please, the comments section is usually informative and sometimes fun. Don’t spoil it for regular readers.

I think Bibby may either be a chatbot AI still busy learning on the job or someone’s cat randomly walking over a keyboard. If not the implications for our general mental health during lockdown are scary…

This is not a ‘treaty override measure’. As a deemed event this takes place the day prior to becoming non-resident and as such the treaties do not come into play.

Same as the deemed disposal – if this did not ‘occur’ before departure then no CGT would be due as non-residents don’t pay CGT in SA other than on property.

Income from retirement funds will still be taxed under the treaties so in essence SARS is only getting their cut from the lumpsum.

The proposal is still poorly drafted with a number of clarifications needed.

Ironically, (the way I see it anyway), this is even more incentive to leave.

Because the sooner you can escape this ridiculously overtaxed, corrupt and socialist regime the better. You’d probably make it all back if you moved to a place with lower taxes + cost in the additional security, savings, insurance and medical aid you need in SA to cover you because your taxes can’t.

Tax to the government just seems to be this lovely never ending barrel of fun – but they’re scraping right at the bottom now & will eventually realise there is nothing left.

Moneyweb can we please get rid of the troll called Bib and Bibby.
The quality of this article has gone down the drain.

Tax the 12 words in my head… I dare you

Milking the cow dry then slaughter it to have the final feast…

End of comments.

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