When an individual ceases to be a South African tax resident prior to retirement from a South African retirement fund and becomes tax resident of another country, that individual’s interest in a retirement fund may, on payment of a lump sum or monthly pension, be subject to tax in the other country. The application of a tax treaty between South African and the country of tax residence may, in some instances, result in South Africa forfeiting its taxing rights – while the taxpayer benefited from tax concessions for contributions.

Taxpayers who remain residents, only have access to their retirement interest upon retirement and face full tax consequences for withdrawals before that time. To address this, proposed changes were included in the 2021 legislative cycle to ensure that before an individual ceases to South African tax, resident interests in retirement funds are subject to taxation in South Africa at the tax rates applicable to a withdrawal benefit. As a result, the government proposed the following two-pronged approach:

When an individual ceases to be a South African tax resident and withdraws their interest in the retirement fund from a South African retirement fund before retirement or death

• The individual will be deemed to have disposed of their interest in a retirement fund on the day before they cease to be a South African tax resident.
• The interest in the retirement fund will form part of the assets of the individual subject to tax applicable to withdrawal benefits. However, the tax payment will be deferred until a withdrawal payment is receivable from the retirement fund.
• When the individual receives a payment from the retirement fund, the tax on the withdrawal benefit will be calculated based on the prevailing withdrawal tax tables.
• A tax credit will be provided for the tax as calculated when the individual ceased to be a South African tax resident.

When an individual ceases to be a South African tax resident but retains their investment in a South African retirement fund and only withdraws their interest in the fund when they die or retire from employment

• The individual will be deemed to have disposed of their interest in a retirement fund on the day before they cease to be a South African tax resident.
• The interest in that retirement fund will form part of the assets of the individual subject to tax applicable to withdrawal benefits. However, the tax payment will be deferred until payments are receivable from the retirement fund.
• When the individual ultimately receives payments from the retirement fund, the tax on those payments will be calculated based on the prevailing retirement fund lump sum tax tables or in the form of an annuity.
• A tax credit will be provided for the tax as calculated when the individual ceased to be a South African tax resident.

The tax practitioner industry noted that bypassing tax treaties (DTA) with domestic legislation is controversial and could potentially result in double taxation for members of retirement funds. Should the Government still wish to address the concern of erosion of the tax base due to emigration, the relevant DTA’s that concern, the Government should be renegotiated accordingly. Members will therefore be required to withdraw from their retirement funds in South Africa, even if they did not envisage doing so and preferred to retain their retirement savings in South Africa.  Although the public understands the rationale behind the amendment, numerous concerns that the amendment will result in a case of treaty override exist and these are noted by Government. Following the extensive public participatory deliberations with public members, the proposed amendments will be withdrawn from the 2021 cycle.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).