The contentious proposal relating to the ability of people emigrating from South Africa to access amounts in their retirement funds is back on the drawing board.
In terms of the proposal in the Draft Taxation Laws Amendment Bill, the payment of lump sum benefits will only be accessible if the member of the fund ceases to be a South African tax resident and has remained non-tax resident for at least three consecutive years or longer (the ‘three-year rule’).
Hugo van Zyl, vice chair of the personal and employment taxes work group of the South African Institute of Tax Professionals (Sait), says National Treasury has requested further comments from large industry players such as fund managers, the savings and investments association and recognised controlling bodies such as Sait and the South African Institute of Chartered Accountants (Saica).
He says the current proposed change is inadequate and unfair. “It is a policy change which calls for transitional rules as formal emigration for exchange control purposes will not be switched off overnight.”
Government has made a policy decision to phase out formal emigration for exchange control purposes.
National Treasury and the South African Revenue Service (Sars) have proposed amending the definitions of the terms ‘pension preservation fund’, ‘provident preservation fund’ and ‘retirement annuity fund’.
Joon Chong, partner at law firm Webber Wentzel, and colleague Wesley Grimm say in a joint article the effect of the three-year rule is that members of retirement funds who emigrate will have to wait for a period of at least three years before they may access their pre-retirement lump sum benefits.
“This will cause financial hardship for people, who may need these funds to start a new life in the destination country.”
During a parliamentary hearing Treasury expressed the view that the purpose of retirement funds is not to fund an individual’s emigration. The tax advantages of investing in retirement funds come with conditions.
With the current formal emigration, an individual has to close most of their South African bank accounts, cancel their credit cards, give up their access to online banking, cannot extend loans back to SA, and all transactions need to go through an authorised dealer.
Treasury notes that once an individual has emigrated, it is difficult for the individual to return to SA.
By phasing out emigration, Treasury hopes to make it much easier for individuals to return to SA, not harder.
Van Zyl says it may not be incorrect to assume that Sars and Treasury were so unhappy about the abuse of the formal emigration process and the “misselling of a bank solution to address tax residency” that they decided to close down rogue industry players abusing a bank process.
In terms of the bank process one could formally emigrate based on an intention and one could file 60 days before departure, provided you had permanent residency or a second passport. This test will fall away if the proposed change is accepted.
Van Zyl says for expats living in non-treaty countries (countries with which SA does not have double tax agreements) or in treaty countries where worldwide income is the treaty test, the unlocking of locked-in retirement funds became nearly impossible.
“I do not think this was intentional, it is a consequence of Treasury trying to do it on their own without speaking to the representatives of the industry,” notes Van Zyl.
Chong says people who have started the formal emigration process but have not completed it by March 1, 2021 (when the proposed change becomes effective) will be prejudiced.
The three-year rule also makes retirement annuity funds less attractive as retirement savings vehicles. The reason for this is that members of retirement annuity funds will have to wait three years to access their retirement benefits, whereas members of pension preservation and provident preservation funds may access certain pre-retirement benefits once prior to retirement and members of pension and provident funds may make a pre-retirement lump-sum withdrawal on termination of their employment relationships.
“Although the three-year rule was proposed to modernise the foreign exchange control process, it is unrefined and raises practical issues which must be urgently addressed,” says Chong.
Treasury is of the view that the three-year rule is doable, but has invited further comments on the matter.