What emigrants need to know about SARS taxing rights on your retirement benefits
Many South African taxpayers are leaving South Africa and withdrawing their South African retirement savings to finance their lifestyles in their new country of residence.
This process has recently become extremely relevant – including the timing of this withdrawal – because the definitions of “pension preservation fund,” “provident preservation fund,” and “retirement annuity fund” in Section 1 of the Income Tax Act were amended with effect from 1 March 2021.
This amendment states that a person will only be able to withdraw his or her lump sum from the applicable fund once he or she has not been tax resident in South Africa for an uninterrupted period of three years or longer on or after 1 March 2021.
Prior to 1 March 2021, no reference was made to such a three-year period.
Rather, an individual who emigrated from South Africa for exchange control purposes could immediately access their interest in a pension preservation, provident preservation or retirement annuity fund before the individual’s actual retirement date and remit such funds offshore.
Why the Income Tax Act was amended
The amendment is in line with the removal of the concept of emigration for exchange control and in line with the new focus on tax emigration (or rather, tax residency).
Non-South African tax residents are only liable to pay tax in South Africa on South African source income. Section 9(2)(i) of the Income Tax Act deems a lump sum or annuity to be from a South African source if the services were rendered in South Africa.
However, in terms of certain double tax treaties between South Africa and the foreign country, such lump sums, pensions or annuities are not subject to tax in South Africa when paid to a non-tax resident and will only be taxed in the country in which the individual is a tax resident.
The effect is that South Africa loses its taxing right to the foreign country provided that the double tax treaty grants the other state sole taxing rights.
Most treaties are based on the OECD Model Tax Convention which contains such provisions in Article 18.
Therefore, the timing of the withdrawal of retirement benefits becomes critically important when considering tax emigration.
What you need to know
The 2021 Draft Taxation Laws Amendment Bill contained a proposal by National Treasury and SARS to introduce a new Section 9HC to the Income Tax Act which will deem an individual to have withdrawn from the fund on the day prior to ceasing to be a South African tax resident.
National Treasury views this as a solution in order to ensure that the fiscus is not prejudiced.
However, the proposed new Section 9HC has not yet enacted and is being reconsidered by National Treasury and SARS.
In the meantime, expats are advised to speak to a tax professional in order to consider the tax consequences of retirement withdrawals pre- and post-tax emigration.
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