When ceasing their South African tax residency, taxpayers are subject to an ‘exit tax’ which forms part of the emigration process.
However, the National Treasury has proposed a further tax on those who intend to permanently leave South African shores, say tax experts at specialist advisory firm Tax Consulting SA.
“In the National Treasury’s latest published Draft Tax Bills, which incorporates the tax proposals made in the 2021 budget, the amendment proposes to tax retirement fund interests of individuals when they cease South African tax residency,” the firm said.
“This proposal is the latest amendment directed at taxpayers who intend to leave South African shores permanently, which may upend taxpayers’ carefully planned retirement.”
The current ‘exit tax’ that applies in the event of a cessation of tax residency provides that a taxpayer will be deemed to have disposed of certain qualifying assets on the day before ceasing tax residency.
This event triggers a tax liability in respect of the growth on these assets before the taxpayer leaves the South African tax net permanently, Tax Consulting SA said.
The assets currently subject to the ‘exit tax’ are:
- Foreign fixed property;
- Unit trusts and other similar investments;
- Trusts – depending on how they are set up and the assets they hold.
The assets currently excluded for the ‘exit tax’ are:
- South African fixed property held in the taxpayer’s name;
- Retirement interests held in pension, provident and retirement annuity funds;
- Personal use assets.
Proposed deemed withdrawal on retirement interests
The Draft Taxation Laws Amendment Bill now proposes, in addition to the existing exit charge, to tax the value of the interest in a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, Tax Consulting SA said.
“It is proposed to create a similar occurrence to the deemed disposal under a new section in the Act (section 9HC) where an individual will be deemed to have withdrawn from their retirement fund on the day before they cease residency.
“The proposed amendment does state that the tax is triggered upon ceasing tax residency. However, the payment of this tax will be deferred until actual withdrawal from the fund.”
The tax will be levied on the value of the interest on the day before ceasing residency but will be calculated in terms of the lump sum tax tables prevailing at the time of payment.
“It seems Government recognises that this measure of relief is necessary, as it would have been burdensome to pay both exit charges concurrently.
“What it fails to recognise is the burden of the unknown rate of the future lump sum tax tables that the actual payment would be made on,” Tax Consulting SA said.
“These rates have remained unchanged for several years, and the government may view these as low-hanging fruit for an increase to drum up additional revenue in future.”
1 March 2022
Due to come into operation on 1 March 2022, this proposed amendment would be a further blow to South Africans wanting to cease their tax residency, following on from the three-year lock-in rule imposed on retirement annuities earlier this year, Tax Consulting SA said.
“The rule stated that individuals must be non-residents for tax purposes for three consecutive years before being allowed to withdraw their funds in full.
“This creates a mismatch between withdrawal and the actual date of ceasing tax residency, which necessitated this latest amendment.
“National Treasury has allowed for submissions opposing the amendment to be put through by the 28 August 2021.”
- Commentary by Reabetswe Maloi and Victoria Lancefield of Tax Consulting SA.