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Another shock for South Africans who need retirement funds to emigrate

It’s getting even more complex and expensive.
Ordinarily, a payment must be due before interest can be charged – but this won’t be the case when it comes to the tax on funds an emigrant must wait three years to receive. Image: Shutterstock

The South African government has in recent years made far-reaching changes to the taxation of retirement funds of South Africans leaving the country, causing uncertainty, concerns and even anger.

The latest attack, where interest of 7% will be levied on a deferred tax debt, may very well be unconstitutional and open to legal challenges.

Joon Chong, partner at Webber Wentzel, says it is a big concern in the retirement industry that the effective date is March 1, 2022, with many practical implementation issues still unresolved.

The proposed inclusion of a new section in the Income Tax Act – Section 9HC – gives rise to many legal and practical issues.

The section was included in the latest draft Taxation Laws Amendment Bill.

Chong also warns that in some instances the same retirement income may become subject to double taxation. Several countries have sole taxing rights in their Double Tax Agreements with South Africa.

These include the UK, Australia, New Zealand, China, Hong Kong, Denmark, Germany, Italy, Portugal and Spain. In terms of the new changes the retirement savings and interest will also be subject to tax in South Africa.

National Treasury argues that in some cases, a person’s lump sum withdrawal following tax emigration may escape taxation in South Africa due to the application of a double tax treaty with another country.

Hugo van Zyl, tax and exchange control specialist, says Treasury is trying to override the tax treaties with a handful of countries where it stands to forfeit its taxing rights.

He explains that people who are exiting their pension funds will now be taxed at 36% for any amount above R1 million and pay interest on a debt that has been deferred.

This is on top of the “exit tax” that is charged on the deemed disposal of all moveable assets.

Read:

Recent changes

Murray Terwin, senior manager at international tax firm Regan van Rooy, explains that financial emigration has fallen away (from March this year). Under this regime a person could withdraw their retirement savings immediately when emigrating – subject to the withdrawal rates.

Now a retirement fund may only allow a person who tax emigrates to withdraw their retirement savings after they have been non-tax resident for a continuous period of three years. The liability to pay the tax has been deferred to the time when the person is actually able to access the funds.

“A person tax-emigrating is therefore left in the bizarre situation that interest is being imposed on an outstanding tax liability during a period when that person is unable to access their retirement funds and to settle that liability.”

Administrative rights

Chong, who sits on the tax administration sub-committee of the South African Institute Chartered Accountants, says at the very least certain fundamental concepts central to lawful, reasonable and procedurally fair administrative rights of taxpayers should be reconsidered.

The new section proposes imposing interest on a tax debt that is not due and payable to the South African Revenue Service (Sars).

She rightly asks whether the purpose of tax collection by increasing the tax base to include tax on retirement fund interests can be a justifiable limitation of the administrative rights of an emigrant.

She refers to sections 189 and 187(3) of the Tax Administration Act, which clearly indicate from when interest can apply for the various types of taxes due. Section 187(3) provides that interest can only be imposed on tax that is due and payable.

This is unlike the new Section 9HC, where tax is triggered but not due and payable until an actual withdrawal from the retirement fund in the future, but interest accrues on the tax.

The rules on charging interest on late payments is settled law on the principle that the debt must, among others, be due before interest can be imposed, says Chong.

She gives an example where a young South African who has contributed to a retirement annuity fund moves to Portugal. They will need to wait three years after ceasing to be tax resident before they can access the retirement annuity fund.

There will still be tax triggered on the deemed disposal in the year of exit. Interest will accrue on the tax triggered (although not due and payable to Sars) over the three-year wait. The tax triggered plus interest over three years will be a rebate against the actual tax due when the taxpayer withdraws the retirement annuity fund in full after three years.

Read: The three-year rule for tax emigration sticks

The proposal accentuates the long-standing problem with the pension deferral regime. It comes at a price, say Keith Engel, CEO of the South African Institute of Taxation (Sait).

Tax may be saved on contribution, but tax will eventually be recouped in some form upon withdrawal – and now on “deemed withdrawal”, he says.

The funds are also locked away from easy access in times of need, as noted recently by former finance minister Tito Mboweni.

“Individual investors should perhaps think a little harder before dumping additional excess funds into pensions versus other savings vehicles,” says Engel.

Failed emigrants

Van Zyl says the proposal does not provide for “failed emigrants”. He says people may be forced to return to SA if they lose their jobs abroad because of the impact of Covid-19.

“The person intended to stay abroad forever, but circumstances forced them to return …. What happens if they return before the three years when they can access their retirement savings? They now have the retirement fund tax around their neck.”

Read: Ceasing SA tax residency – What you need to know

Terwin adds that the value of a person’s retirement savings could well decline over the three-year (or longer) period. “A person could thus have a tax liability, plus interest, on an amount that is significantly less than what that person is able to finally receive.”

It is clear that the government is doing what it can to mitigate the risk of what seems to be an increasing trend of tax-paying South Africans emigrating from South Africa.

Read: Expats want to remove their administrative footprint in SA

“What is not obvious is whether these proposals will necessarily achieve that aim,” says Terwin.

“What is clear, however, is that tax emigrating from South Africa is becoming increasingly complex and costly.”

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When you live in a broke A** country they will BLEED every cent they can from the few remaining workers!!! Instead of good education for future employment, instead of creating a sustainable economy, instead of creating good jobs in a friendly business atmosphere, instead of getting people from government welfare to working, you have inept people in government taking the country down the toilet. OH BYE THE WAY THOSE SAME INEPT PEOPLE HAVE RETIREMENT PROGRAMS BETTER THAN YOURS!!!! Can you say 3rd world and loving it???????

Just trying to understand the fuss (that causes the said anger)… this 3 year wait only applies Retirement Annuities and Preservation Funds where you have already withdrawn a lumpsum once (and maybe Living/Life Annuities), right?

Your Pension/Provident Fund at employer you can fully access (subject to tax as per tax tables that have existed a long time) fully by leaving the employment, and you can also also withdraw everything from a Preservation Fund if you have not already made a withdrawal (subject to tax as per tax tables that have existed a long time) .

I also am not sure what this deferred debt story on retirement savings story is about, if someone can explain what that is about?

Agreed, in effect this restriction only hits retirement annuities, and preservation funds that were previously accessed.

One can even avoid the preservation fund one, by transferring it back to a workplace pension or provident fund, where applicable.

Retirement funds are always taxed on withdrawal, and nothing has changed, so all that fuss about this ‘new emigration tax’ is nonsense. Before, the withdrawal tax would be levied on actual withdrawal, whenever that was, now it is fixed at the “exit date”. Not unreasonable to expect some interest levied on this thereafter…the fund growth should be able to exceed that over time.

Of course, if you stay invested in a high equity portfolio, then you do run the risk that, due to market volatility, you are going to pay more tax at withdrawal than otherwise. That should be addressed in the legislation.

I don’t buy NT’s story about Double Tax treaties. Retirement funds were always deemed to be from a South African source, and taxed locally, notwithstanding our residence-based tax system. The same applies to annuity proceeds.

I think the intent is more insiduous: NT is looking to bring in compulsory preservation through the back-door, by selling it as “you can now access one-third of your fund any time you want, subject to compulsory preservation of the balance.” If that comes in, it will make it much harder to access any type of retirement fund on emigration, because access to two-thirds will be restricted. So cashing out your full pension or provident fund before leaving will no longer be possible.

I’m still not clear what the position is if you don’t actually withdraw. Does the deemed (“triggered”) tax plus interest effectively fall away at age 55 ?

As far as annuities go, some DTAs define annuities in a manner that excludes ‘living annuities’, which could have unintended consequences.

Hallo CV63 – you say you don’t buy the double taxation story. You should! Here’s article 17(1) of the UK-RSA DTA:
“Pensions and other similar remuneration paid in consideration of past employment and any annuity paid to an individual who is a resident of a Contracting State shall be taxable only in that State”

In other words, any pension paid to an SA tax resident from a fund in the UK is only taxable in SA, whilst any pension paid to a UK tax resident from a fund in SA is only taxable in the UK.

By levying this new tax the day before an SA tax resident emigrates to a country with a similar treaty to the UK, SARS has circumvented the treaty. When that hapless individual draws a lump sum three years later, it will be taxable in his new country. Because the DTA awards sole taxing rights in this case, he/she will not get any relief for the tax levied three years before in SA. So double taxation. It’s a devious tactic by SARS and a clear show of bad faith to both SA taxpayers and the partner DTA countries.

@Buckie

I take your point on the DTA. But will it really lead to double taxation?

Per the article, “the tax triggered plus interest over three years will be a rebate against the actual tax due when the taxpayer withdraws the retirement annuity fund in full after three years.”

If true, surely the rebate can only refer to the tax levied in the other jurisdiction. Also, does the fact that the tax is paid only on withdrawal not make it available for offset in the other jurisdiction?

I get that SARS wants its tax slice of SA-sourced capital, but I doubt they would go so far as to risk subjecting pensions to double tax. That would undermine the point of the DTA.

I want to know, can you transfer a personal retirement annuity to a preservation fund. Then make a full withdrawal?

No. You can never transfer a more restrictive retirement fund to a less restrictive retirement fund.

So, you can transfer a preservation fund to an RA but not the other way around.

Correct CV63

Kieswetter has turned me into a tax avoidance king, exploring possible legal angle, avoiding the grey areas, to limit my tax liabilities

He is seriously pushing me further into grey areas I would not have considered in the past.

Disgusting bunch this

does not matter how one look at it, the sa government needs money in any form that can be called tax, due to the fact that what they inherited was, and is still wasted on useless cadre employees, bee,every current soe + anc faction infighting (latest kzn / gauteng riot) under the hypocritical excuse for poverty while the actual guilty parties are still running free. the anc sees the taxpayer as an inexhaustible source of easy income, but with a self created ruined economy by the anc, that source is dried up now

I agree they need tax and what they definitely do no need is the people who pay most tax immigrating. So I see the whole 3 year thing as a means of trapping high income individuals, so that they cannot leave and take their earning power to another country.

More complex tax regimes do not always mean more tax collected.

Less and simpler can be more.

Remember the we need investment and these laws are disincentivising investments.

Based on your name I am sure that you are aware that most African governments do not try and grow the economy instead they just redistribute the countries wealth into the hands of the politically connected. This is the process that is currently underway within SA.

“… t is clear that the government is doing what it can to mitigate the risk of what seems to be an increasing trend of tax-paying South Africans emigrating from South Africa”

So the ANC having morphed into a anti-white party, is worried about whites leaving?

Nice to know “white I.P” is the life jacket they need and don’t really want

The sad thing is that they are trying to mitigate the risk with punitive measures. The risk could easily be fixed if the ANC created the perception that whites are welcome in SA. However, more importantly there would have to be the perception that the whites kids had a future in SA where they could be properly educated and obtain suitable employment.

So they want to impose an exit tax on money which you can only access in 3 years? The 3 year limitation being their construct. The ANC is obviously trying its best to milk everything for money. The end game for SA is here.

I have not yet had a chance to study the law but one solution could be to withdraw the funds prior to emigrating. Unfortunately, that would trigger tax on the withdrawal.

Is it possible to emigrate, but to tell SARS you’re still a “SA resident, temporarily abroad”….? (…as you’re planning to return sometime to SA in future 😉

(In that case, you’d expected declare your foreign income to SARS as a resident, apply the Section 10(1)(i)(o) Foreign Income Exemption of R1,25million, and give proof of foreign credits paid abroad to claim your S.6quat rebate. Unless you work in a zero-tax country like the UAE, I cannot fathom that you’ll pay extra tax to SARS).

By declaring yourself as a “SA res temp abroad”, no exit tax will apply, and you stick it out until after 55-age, then “normally retire” on the more beneficial lump-sum tax tables.
And if your returns are behind come retirement age, skip the “lump-sum tax directive” part, and withdraw everything as a full 3/3 compulsory living annuity.

Your full living annuity would be subject to tax in SA, but in isolation of foreign pension income, the latter foreign employment pension will be taxed separately….so in isolation of each other, you’ll pay the least in tax possible (post retirement) coming from 2 or more country sources.

(Yes, many may argue, “I need my retirement funds abroad”. Well, WHY do you want to do it…? If still working, you’re not supposed to touch it in the 1st place. And WHY…sacrificing an Exit CGT tax, plus have tax on retirement fund withdrawal pre-55-age. There would be much left after a huge chunk is gone. Rather leave it in SA, link the fund to global underlying funds, and retire ‘normal’ in a stealthy way, and pay little income tax post-retirement…while abroad. Just keep your bank accounts active in SA. It’s the waiting game that freak people out.)

This is the exact conversation I have with clients who are looking to leave SA. As they they hit 55, retire and move into 100% offshore LA.

Yes, some countries require you to give up citizenship when emigrating there, but that is a rare case.

If this tax is deferred and credited against the eventual tax, it is not an additional tax at all. It seems SARS is merely fixing the calculation of the amount on same date as emigration, which seems sensible.

There is probably a tax scheme that was running that this change seeks to plug, and which normal people with tax lawyers are not aware of??

In all, what had to be stopped and dated back, is the concept that Johnny could have 35 years of RA tax deductions and then not be taxed on the subsequent annuity by way of having become a Maltese. That was a blatant loophole at the expense of all SA taxpayers. If people complain, then fine : recoup on date of emigration the tax deductions plus growth on tax deductions. It is no different than benefiting from wear and tear deduction, the later selling the asset and not recouping the allowances in calculating tax consequence.

These could be very large numbers – imagine the retirement fund value of one of the retiring hired help in corporate SA. The annual pension is probably > R1m.

Johan – there’s no loophole. SARS willingly entered into double tax treaties in the past with a number of countries (including some popular emigration destinations) under which pensions are only taxable in the taxpayer’s country of residence. This works against the SA fiscus when an SA tax resident emigrates, but works in its favour when a foreign tax resident immigrates to SA.

There used to be plenty of overseas retirees coming to live here and SARS would quite happily tax their pensions despite their contributions having been tax privileged in another country. Of course the flow of such immigrants has pretty well dried up by now, which helps to explain why an increasingly desperate SARS is now resorting to underhand tactics to circumvent the DTAs.

Buckie:

So as things were, if Johnny emigrated to Mauritius, would Johnny’s pension from SA be taxable income in Mauritius? You can replace Mauritius with any of dozens of other locations.

It is patently absurd that a fund where contributions were taxable in one entity then sees its distributions being taxed elsewhere.
Perhaps the simplest to avoid DTA objections is that all past tax deductions plus growth (which was untaxed in SA for their duration) are recouped just like depreciation on an asset disposed of. There is no defensible argument against that method?

buckie : the swallows that I know of that live most of the time in SA on UK pensions do not pay tax here on that income. Perhaps they are not SA tax resident?

Johan – the Mauritian DTA is different from the UK agreement. in the case of Johnny, SARS would already have the right to tax any SA source pension paid to him in Mauritius. If Mauritius also wants to tax the same income, he would get relief from double tax.

You may think it unfair that the SA fiscus allows pension contributions to be tax deductible, then loses the right to tax the pension payments if the individual has emigrated to certain countries like the UK. However, that is how the DTA works with those countries. If a UK resident moves to SA, then it would be the UK fiscus that loses out and the SA fiscus which gains by getting sole taxing rights to that person’s pension.

As for those swallows you mention – if the SA tax regime was more favourable than in their home country, I imagine a lot of them would prefer tax residency here. But they would first have to get permanent residency.

Let me put this in perspective for those who say this isnt so bad.

You are on the verge of retirement and you want to settle in Portugal or some other country where you won’t get your throat slit.

You have everything set up and calculated your pension will cover all the costs. Only problem is that the regime wants your money but doesn’t want you and decided to put a hold on your pension for 3 years and plus penalties.

You cannot apply for a type D visa in most countries now as you have to wait 3 years and by that time anyway the Rand would have tanked further

Bobsmith : do you agree that a sizeable chunk of that pension pot is difectly attributable to the tax deductions of the past 25 years or whatever?

Is all your money in an RA or previously withdrawn Preservation Fund? If no, why can’t you access it immediately? The law doesn’t prevent that.

If you are on the verge of retirement, I assume you over 55 or close to it. So why don’t you just go live in Portugal, retire from the RA, take 1/3rd, and move the 2/3rd into a Living Annuity with 100% offshore allocation. Then you take your 17.5% annual lump sum (pay PAYE tax on it in SA) and remit offshore…..

The problem is that ALL of your assets remaining in South Africa (including a LA invested in a 100% offshore portfolio) will be subject to expropriation without compensation for as long as the cadres continue to run out of other people’s money.

I get the difficulty with DTA we have that govern the taxation of retirement income between us and SOME countries.

But is fundamental rubbish that persons get a tax deduction here for decades, the growth in the fund is tax-free for those decades, then decide to skip and not pay tax.

To get past the DTA thing:
Fine, your monthly payment can go to Malta with no SA tax.
But first your fund will pay a tax on a proportion of the value of your funds at date of ceasing to be tax resident here. View it is a recoupment very similar to how 12J works or a tax depreciation charge.

The actuaries can probably work out a table based on time and value now to split how much belongs to SA Inc and how much belongs to Johnny. In order to reflect the three decades of not being taxed on fund income, one will probably need to deem 75% of the value of the fund as taxable income so a 30% one-time deduction from fund is likely outcome?

End of comments.

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