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’