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Double taxation: did Sars tax me correctly?

I have been a tax resident offshore since 1981. Sars taxed my lump-sum payout from my matured SA annuity policy on the full amount before payment was made into my account.
Taxpayers who don't live in South Africa are usually only subject to SA tax on their income from sources within the country. Picture: Shutterstock

I formally emigrated from SA in 1981 and have been a tax resident offshore since then (in Spain since 2007). From 1981 to 2012 I continued to fund an Old Mutual annuity policy with already-taxed offshore income. When it matured in 2012 I elected to take a lump-sum payout and was taxed on the full amount by Sars before payment was made into my blocked rand account. I exported the funds and purchased an annuity policy in Europe. I am now taxed annually on that income in Spain, with no way to avoid it.

Question: Is Sars tax on the payout to a foreigner who is not tax-resident correct, given the existence of a ‘typical’ double-taxation agreement?

Gavin Butchart - Brenthurst Wealth Management (Pty) Ltd

The reader stated they formally emigrated and have been a tax resident offshore for some time, however they continued to contribute to their South African Old Mutual annuity, from already-taxed offshore income.

From a South African point of view, retirement annuities provide individuals with an option to save for retirement in their personal capacity, while provident and pension funds are offered and administered by employers to employees. Retirement annuities are generally paid by taxpayers directly, using after taxable income and claimed as a deduction in their annual South African income tax returns, which are subject to the prevailing tax limits.

At retirement age you have the option to then retire from the fund, commute up to one third of the fund value taxed according to the retirement tax tables with the remainder used to purchase an annuity, which would then be taxed at source, according to the individual’s marginal tax rate.

Unfortunately when non-resident taxpayers elect to commute the full amount with regard to a retirement annuity, the withdrawal tax tables are applied.

The lump sum commuted on ‘formal emigration’ will be taxed in terms of the table below:

Amount Tax rate
R0 – R25 000 Nil
R25 001 – R660 000 18%
R660 001 – R990 000 27%
R990 001 – above 36%

Non-resident taxpayers are usually only subject to South African tax on their income from sources within South Africa. If a non-resident member elects to leave the benefit in South Africa and purchase an annuity at retirement, then the annuity will be taxed at the member’s marginal tax rate. However the non-resident can elect to apply for a directive for relief in respect of withholding tax from their annuity income.

The purpose of the double taxation agreements between the two countries is to enable the administrations to eliminate double taxation, and to prevent tax evasion by providing for the exchange of information between the countries. The lump-sum withdrawal was therefore taxed in South Africa and current annuity withdrawals are taxed in Spain.

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Sounds like this person made contributions after some point for which he did not claim tax deductions in either Spain or SA. So from SARS point of view, they are “disallowed contributions” He needs to check if that was taken into account, that component should not be taxed twice. There is a complicated computation that the SARS system will do automatically. Just ensure that they know what are so-called “allowed” and “disallowed” contributions.
As for the Spanish side, it sounds pretty harsh. Btw …Shakira just got klapped with a 20M EUR tax bill in Spain.

It’s no different here. Annuity income is taxed as if it was a normal salary in RSA as well.

There is an exemption in SA in some cases if the annuity was funded with already taxed funds. Likely the same in jurisdictions other than SA.

No idea why he continued to contribute to an SA RA when he was not resident in SA and not entitled to any tax relief in SA.

The withdrawal tax isn’t covered in any DTA agreement so he won’t be able to set off against other taxable income in Spain.

In my view there should be an argument that he should only be liable for withdrawal tax on the portion of funds as at date of formal emigration, plus the growth thereon (there’s an interesting calculation). This would follow the logic applied in SARS BPR 156.

Good luck with SARS though!

Agree with all comments above.

It served little purpose to contribute towards a RA Fund (in SA) but not able to claim it against any (local/SA) income at the time, such as if you had taxable property-rental income for example. Whether you claim the contributions or missed claiming it, the proceeds will still be subject to tax.

(SARS allows for excess RA Fund contributions, in excess of the annual cap, to be carry forward to increase the retirement tax-free lumpsum…but if the contributions are not claimed on past SARS returns, there is likely no carry forward contributions).

Locally, Section 10(1)(gC) of the Income Tax Act exempts any foreign pension income to be received by a SA resident (as the presumption is that foreign pension income is taxed in the country of source). This rule applies widely to many other countries.

The problem is such: (i) IF you kept the fund within SA, then Old Mutual would’ve been obliged by law to first deduct any PAYE-tax on your pension, and would then transfer the after-tax pension into your Spanish bank account (where such income is not taxed again coming from a foreign source), or (ii) as what you’ve done….you transferred the compulsory portion of the fund (likely tax-free) to a similar fund in Spain. Now, Spanish tax rules apply as if you’re a resident in Spain, receiving your pension.

To conclude: irrespective the approach, you’ll pay income tax on the two-thirds compulsory portion in EITHER country, but not both. The country in which the fund is registered, will apply tax tax rules for that country. (As I assume no tax was paid on the 2/3 fund transfer from OM to the Spanish assurance comp, you’re not worse off)

The only way to determine whether you’re better off tax wise, is to perform an Individual tax comparison, by converting your Euro pension income back to ZAR, and apply the SARS table) and do the same using the Indiv tax tables for pensioners in Espana.

Espero que esto ayude? Gracias.

End of comments.

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