By Amanda Visser
A raft of changes and proposed changes to the taxation of retirement savings have raised, quite understandably, a lot of fear and uncertainty among South Africans who are living abroad or are on the verge of leaving.
The latest proposal in the Draft Taxation Laws Amendment Bill seeks to secure taxing rights for South Africa on payments from retirement funds in all instances. It will now get its “last bite from the cherry” even if the country in which the South African is tax resident has the sole taxing right on payments from retirement funds in terms of a double tax agreement.
The proposed change will become effective from March next year.
Joon Chong, partner at Webber Wentzel, says it is a big concern in the retirement industry that the effective date is 1 March 2022 with many practical implementation issues still unresolved.
Chong also warns that in some instances the same retirement income may become subject to double taxation. Several countries have sole taxing rights in their Double Tax Agreements with South Africa.
This include the UK, Australia, New Zealand, China, Hong Kong, Denmark, Germany, Italy, Portugal and Spain. In terms of the new changes the retirement savings and interest will also be subject to tax in South Africa.
Gavin Duffy, partner at PwC, says the Organisation for Economic Cooperation and Development provides in the Model Tax Convention that payments from retirement funds are taxable only in the country where the individual is tax resident. South Africa has negotiated with these countries for them to have sole taxing rights.
National Treasury’s thinking is that the South African enjoyed the tax deduction on contributions to retirement funds, but another country gets the tax on the income from the retirement fund.
Hence, the proposed change.
In order to secure taxing rights for South Africa, treasury proposed that on the day before the individual ceases South African tax residency, the taxpayer will be “deemed to have withdrawn” from all South African retirement funds.
But, from 1 March this year South Africans must be tax non-resident for three continuous years before the retirement annuity fund and preservation fund (where the one election for withdrawal has been taken) may allow withdrawals. This means a tax is triggered on a deemed withdrawal, but no payment has been received.
Given the immense cash flow consequences of this timing mismatch, treasury has deferred the deemed tax liability until the taxpayer actually receives payment from the fund. During the three year wait the South African Revenue Service will be allowed to charge interest on the deferred debt at a (current) rate of 7%.
International tax firm Regan van Rooy earlier said South Africans emigrating are therefore left in the “bizarre situation” that interest is being imposed on an outstanding tax liability during a period when that person is unable to access his retirement funds and to settle that liability.
Duffy is quite critical about the proposal and says it appears that National Treasury made it on the assumption that all South Africans who are leaving will never return.
He says there are many instances where South Africans leave the country on assignments abroad and become tax non-resident while they are working abroad.
When they become tax resident in the host country, the deemed withdrawal will have triggered and they will have a tax liability with interest, even if they intended returning to South Africa after concluding their assignments.
Hugo van Zyl, tax and exchange control specialist, also noted earlier that the proposal does not provide for “failed emigrants”. He says people may be forced to return to SA when they lose their jobs abroad because of the impact of Covid-19.
“The person intended to stay abroad forever, but circumstances forced them to return. . . what happens if they return before the three years when they can access their retirement savings. They now have the retirement fund tax around their neck.”
Wealth creators say people who are contemplating emigration may consider a single withdrawal from their preservation funds before they emigrate. They can withdraw the full amount, and will be taxed at the punitive tax withdrawal rates, but then they are free.
The same applies to pension or provident funds. People may withdraw before they emigrate, but again the punitive withdrawal tax rates will apply.
People contributing to retirement annuity funds will only be able to access their savings after three years when they become tax non-resident. The “deemed withdrawal” may be applicable to them.