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Clarity on taxation of ‘expat’ pensions

Good news for South Africans who worked abroad.

JOHANNESBURG – A number of pensioners and tax specialists heaved a collective sigh of relief after the South African Revenue Service (Sars) ruled that any pension South Africans accumulated while working outside the country will generally not be subject to local tax.

Uncertainty about the treatment of these pensions and a difference of opinion between Sars and some tax experts, triggered several disputes on the issue over the last few years.

Piet Nel, project director for tax at the South African Institute of Chartered Accountants (Saica), says where South African tax residents worked outside the country for a period of their careers, local tax legislation allows for the pension that relates to that period to be taxed in the other country.

“So technically it should be exempt from tax in South Africa.”

Nel says Sars was of the opinion that for the pension to be exempt from tax, the taxpayer had to have worked outside of South Africa and it had to be a foreign pension fund.

Many tax professionals disagreed with this stance and argued that if pension fund contributions were made to a South African pension fund while the taxpayer was working abroad, the legislation also allowed for a local tax exemption in retirement.

These stakeholders contended that a South African taxpayer who worked outside the country and who contributed to a South African pension fund during that time, would not have been allowed a tax deduction for pension fund contributions and should therefore not be taxed on that portion of their pension in retirement.

Sars disagreed and several disputes followed.

To provide clarity on the issue Sars issued a Binding General Ruling earlier this month. According to the ruling any pension that accrues to a person in respect of services rendered outside of South Africa will generally not be subject to tax in South Africa.

Nel says that where the taxpayer worked in South Africa as well as abroad, the exemption will be calculated based on the period where services were rendered abroad.

For example, if a taxpayer worked for 20 years of which ten years were spent in Namibia and the rest in South Africa, 50% of the pension will be taxed in South Africa and the rest will be exempt, he says.

One important exception is cases where South Africans worked for the state.

“Your government pension fund will always be taxed in South Africa regardless of where you worked internationally,” he says.

Although the ruling is only applicable to pension funds, there are proposals on the table to amend the legislation to include retirement annuities as well as lump sums in future, Nel says.

Where South Africa has an existing double tax treaty with another country, the taxation of pensions earned in that country may be dealt with on a different basis, he says.

The ruling is effective from November 14.

Adrian Lackay, spokesperson for Sars, says the Binding General Ruling sets out the Sars official view and disputes will be dealt with according to the law as set out in the Binding General Ruling.

Listen to the full English podcast with Tarryn Atkinson here.

Luister na die potgooi met Piet Nel hier.

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