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Is the proposed tax on retirement interests an ‘exit tax’?

The purpose is to ensure SA does not lose out on its right to tax a person’s assets….
Image: Victor J. Blue/Bloomberg

The most contentious proposal introduced by the 2021 Draft Tax Bills is arguably the tax on retirement interests when a person ceases tax residency. The proposed tax has widely been christened as a further ‘exit tax’ imposed on South Africans leaving the country. However, based on responses by the Minister of Finance to a written parliamentary Q&A, some have questioned whether the proposal can rightfully be classified as an ‘exit tax’.

It is not intended to analyse the written parliamentary exchange, which seems to conflate issues that are unrelated. The purpose of this piece is to consider if the proposed tax has been misclassified as an ‘exit tax’.

What is an ‘exit tax’?

Section 9H of the Income Tax Act contains a provision that imposes a tax where a person ceases their South African tax residency. In essence, the provision treats such a person to have disposed of their assets (subject to limited exceptions) on the day before they ceased residency, which results in a tax liability.

The purpose and justification for levying this tax is explained in Sars’ Comprehensive Guide to Capital Gains Tax:

“The imposition of an exit charge protects the tax base…. Were South Africa not to impose an exit charge … when a taxpayer ceases to be a resident it would be very difficult for Sars to collect the tax due when the assets concerned are actually disposed of. Exit charges are common in many open and democratic countries.”

In other words, the purpose of this tax is to ensure that South Africa does not lose out on its right to tax a person’s assets on account of their cessation of residency. It is aptly labelled an ‘exit tax’ or ‘exit charge’ because it is the final tax levied on a person’s assets before they exit the South African tax net. National Treasury also refers to this provision as the ‘exit tax’ or ‘exit charge’ and has done so in several of its Explanatory Memoranda over the years.

Is the proposed tax on retirement interests an ‘exit tax’?

The proposed tax on retirement interest is introduced under section 9HC, which is also triggered when a person ceases residency. Similar to the existing exit tax, the person is treated as having disposed of their interest in a retirement fund on the day before they cease residency.

The Explanatory Memorandum issued by National Treasury outlines the reason for introducing the tax:

“When an individual ceases to be a South African tax resident before he or she retires and becomes a tax resident of another country, that individual‘s interest in a retirement fund may be subject to tax in the other country. The application of a tax treaty between South Africa and the new tax resident country may in some instances result in South Africa forfeiting its taxing rights.

To address this anomaly, it is proposed that changes be made in the tax legislation to ensure that when an individual ceases to be a South African tax resident, interests in retirement funds are subject to taxation in South Africa…”

Patently, the purpose of the proposed tax on retirement interests is, again, to ensure that South Africa exercises its taxing right before the taxpayer ceases residency. It is imposed in consequence of a taxpayer’s exit from the country and, by extension, the South African tax net. This is clear from the Explanatory Memorandum and the design of the proposed section, which mirrors that of the existing exit tax.

Whether the minister of finance actually disputed the classification of the proposal is not clear. Be that as it may, it is untenable to contend that the proposed tax is imposed for any reason other than a person’s departure from South Africa. The proposal to tax retirement interests upon cessation of residency is beyond any doubt an ‘exit tax’.

Jean du Toit is head of tax technical at Tax Consulting South Africa’

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Jip – It is the final punishment meted out by the ANC for being a successful person leaving this country behind !!

They do now realize that people are not going to save their retirement funds in South Africa anymore?

And people are going to stop using before tax products to provide for your retirement.

It is just so much easier, pay the tax and take your money where it is appreciated.

Saving the tax now to just pay the tax later does not make much sense in my books. People say “But you have more money working for you”….ok, but that just means there is more money that can be clawed back with taxation changes through the years.

If the intention is not clear to everyone: “Your money will not stay your money” then this piece of legislation makes it very clear.

Correct – the local retirement funds are next in line for expropriation !!

Thank you SARS, I will minimize my pension contributions in March/April next year.

I will spend what I earn on myself and for myself while you watch.

I am not your slave.

I am not sure what the different authors get from labels like “exit tax”. It is not, or at least not any more than any situation in which a taxpayer chooses an early termination of a longterm tax arrangement.

The RA tax arrangement is that:
1. you get to deduct from current taxable income your current contributions in full.
2. You get to not be taxed on the income and gains on the invested funds from now till retirement.
3. After you retire you get to take a portion of the fund out tax-free
4. But the party stops when you retire : your withdrawals are taxed as income.

The persons emigrating are seeking to get away with all the benefits but none of the obligations. Allowing people to avoid stage 4 above would mean the SA taxpayers are funding the post emigration life of the departed.

None of the complaining authors pay any attention to the fact and reality that many popular emigration destinations would NOT TAX THE SOUTH AFRICAN RA WITHDRAWALS under sourcing rules. Happy little island only taxes locally sourced income…

For an absolutely crystal clear explanation of the absurdity of NOT taxing the RA of emigrants, consider Mary and John that are twins in their incomes and investment returns. John chooses RA route and contributes R10k per month for 30 years, pays no tax on the income and sits with an RA worth around R18m just before retirement – John invested not only the R10k but he also topped up with the R54k tax deduction he received on his tax deduction. Mary chooses to invest directly after tax, so she only has R8m of after tax money in her retirement nest egg. Both invested R10k of of earnings in total.

If nobody emigrates, John is taxed on his monthly RA at his marginal tax rate. Mary draws from her nest egg tax free.

But now because John chooses to emigrate, he wants his R18m in full. All the tax benefits, no obligation. John would have been a great millennial if he borne 30y later.

The entire issue is no different than tax wear and tear or 12J. When you sell the asset you recoup the deductions granted to you in the past under a deeming provision the asset would be worth zero after the deprecation term..

Johny does not get to sail off to his tax haven with his R18m. In my books he actually owes the country all deductions as well as now should get taxed on all the income that was exempt all those years. If SARS gives these people a better treatment they should take the money and run before the politicians figure this out.

100% agree with you. MW readers are now stuck with the complaining mentality and do not play everything on its merit. It’s simple, if you derive a benefit today for a future event and you are not able to meet your obligation for this future event – restrospectuve tax action applied

Sometimes we are a whiny bunch. Americans are taxed for the income they earn outside the US even if they no longer live in the US, the only way to prevent this, is to relinquish their US citizenship. Permanently.

So you 2 support these ADDITIONAL taxes do you?…

Since when was this mentality if paying more and more tax acceptable?

Why are we not fighting to be taxed less on all fronts?

I would suggest that this is why you have tax treaties so that an individual is taxed in their country of residence when the taxable income is disbursed, not in advance of this. The other side of the coin is that it would be very easy to be taxed twice; once by SA as you leave and again as the income is “earned” in another country.

I think there are two underlying “principals” behind the exit tax. One, SARS and the ANC are desperate for loot and will grasp anything they can. Two, the ANC “leadership” including at SARS is steeped in hard line Stalinism so leaving (and freedom) is traitorous, to be discouraged and a penalty paid to escape. The Nazis were no different.

Paul: Mary would not pay tax on withdrawals from her nest egg (except future capital gains). John would also not pay tax on the then after tax RA fund in HappyIsland. The double taxation argument is a red herring.

Johan: I’ve seen you using the same argument on this issue before and I’m afraid you haven’t got your facts straight. Whilst it’s true that SA loses its ability to tax future income from a tax privileged pension fund when a person changes tax residence, that income becomes taxable in the new country of residence. Sure, there are a few low tax locations where the pensioner will pay less tax than in SA, but if he’s going to USA, UK, Oz etc he will be taxed on it. You of course will feel that’s UNFAIR because it’s the SA fiscus that allowed the tax deductions originally, but it cuts both ways – someone immigrating to SA with foreign pension income will be taxed on that income in SA despite his/her pension contributions being originally tax deductible in another country.

It’s a principle of reciprocity that countries agreed to when they signed up for double taxation agreements. This latest measure is designed to circumvent South Africa’s obligations under DTAs and will in many cases lead to double tax for an emigrating pensioner. Please explain how that’s FAIR?

PS Do you work for SARS?

Why would you be taxed twice? Once you are deemed to have withdrawn, you have withdrawn. You cannot withdraw the same amount twice. As far as the foreign jurisdiction is concerned, the deemed withdrawal becomes an asset that is held by the emigrant, so is not taxed when the money is accessed.

@CV63 You’ll be taxed twice because the deemed withdrawal happens while you are still SA tax resident so you you can’t claim treaty relief. When your funds are finally unblocked 3 years or more later, any amount withdrawn will be treated as wholly taxable in the new jurisdiction.

@buckie You don’t get it. Once you are deemed to have withdrawn, you have withdrawn. The de facto nature of the beast changes from pension income to an investment asset. If you leave money in a unit trust and you emigrate, you are not taxed on the proceeds of that either when you cash it in later on. You may pay income tax/CGT on subsequent gains, post emigration, but that is another matter (those will no longer be taxed in SA).

The ATM machine that so easily and lavishly supplied their criminal styled gravy train of the past quarter century has run completely dry, now they all running around in desperation, frantically trying to find any possible means to hammer the thing into oblivion, in the hopes of any last few cents they think they can still get their hands on to try and maintain their “Christmas is forever partying” delusion they thought would last forever. It’s absolutely pathetic observing.

End of comments.

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