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:
|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.