President Cyril Ramaphosa has signed the Taxation Laws Amendment Act (TLAA) into law, which will introduce key changes to retirement and emigration.
Under the current legislation, a person who emigrates from South Africa and has formalised their emigration using the ‘financial emigration’ process, can fully withdraw their retirement funds, says Jonty Leon, legal manager at Tax Consulting SA.
This would include for example the withdrawal of a retirement annuity, prior to maturity of that fund, he said.
“This has been useful for many South Africans who have left or are currently leaving, as often these funds are used to set themselves up in their new home country.
“It also allowed for taxpayers to decide to remove their investment and invest in something more viable for their new circumstances.”
Leon said that South Africans who have already financially emigrated still have the opportunity to withdraw their retirement funds under the current regime.
“Those that have finalised financial emigration, or have their full application submitted to SARB prior to 28 February 2021, will now have the opportunity to withdraw their retirement funds under the old dispensation until 28 February 2022.
“Government has thus provided a one-year extension on what was previously announced, to withdraw those funds with financial emigration.”
Retirement withdrawals after 1 March 2021
However, without financial emigration, and from 1 March 2021, taxpayers will only be able to access their retirement benefits if they can prove they have been non-resident for tax purposes for an uninterrupted period of three years, Leon said.
“How the new system will practically work is yet to be set out, taking into consideration the policy provider’s requirements, SARS requirements, the need for documentary supporting evidence and proof of non-residency status for three consecutive years.
“What we do know is that a more stringent verification process and risk management test are in the pipelines, if the Budget Speech in February 2020 is anything to go by. So, expect a more difficult time post 1 March 2021.”
The immediate downside for those that will not be able to withdraw these funds as soon as they need them is self-evident, said Leon. However, the longer-term downsides of a lock-in period, which come with far more uncertainty, need to be taken into account as well, he said.
Other factors to consider
In addition to the above considerations, Leon said that South African taxpayers should also consider the following:
- The 2020 Budget Speech spoke to relaxing regulations around exchange control, which comes as a stark contrast to the legislation passed, which effectively traps retirement funds in South Africa. If a piece of legislation like this can be passed, seemingly out of nowhere, and with such robust argument in favour of it from National Treasury, where does this take us? There are no guarantees that the government may not decide to extend the three-year period for another three years, or perhaps indefinitely;
- Part of the ANC agenda has focused on “prescribed assets” for retirement funds – this narrative is particularly frightening if your funds are trapped in SA. Your retirement fund manager is not allowed to invest your funds as you see best for your retirement; their investment decision is subject to Regulations. If this agenda gains traction, we could potentially find ourselves forced into investments which drives other causes than your direct personal well being. Explained differently, leave your money behind in South Africa to finance Eskom or perhaps SAA;
- The ever-weakening rand may diminish the worth of the retirement fund held in SA. Who knows what the Rand will look like in three years – or more;
- The tax rate of retirement fund withdrawals has remained stagnant at a maximum rate of 36%, while the personal income tax rate has increased to 45%. Retirement fund withdrawals are a soft target and there is risk this may increase while your fund is locked in.
“South African taxpayers who hold retirement funds in SA but are living abroad need to carefully consider their options,” said Leon.
“Time is of the essence with little over a month to exit under the current regime. With such stark amendments, and an aggressive effort from SARS to recover revenue at all costs, leaving one’s head in the sand or adopting a wait and see approach is certainly not a smart option.”