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Tighter rules for retirement fund withdrawals by South Africans living abroad
DE WET DE VILLIERS Director: Private Clients, AJM Tax
BOBBY WESSELS, Associate, AJM Tax
New tax laws introduced during January 2021, require South
Africans living abroad to have been non-tax residents in
South Africa for a continuous period of three years on or after 1 March 2021, in order to have early access (before retirement) to their retirement savings. Previously, individuals could access their pension preservation fund, provident preservation fund and retirement annuity fund (collectively referred to as ‘retirement savings’) either upon emigrating for exchange control purposes through the SA Reserve Bank (SARB) (so-called ‘financial emigration’), or when reaching the age of 55.
The tax law changes (which take effect on 1 March 2021) directly relate to the phasing out of the ‘financial emigration’ concept. In addition to this, the February budget proposed further changes in the taxation of these retirement savings.
The changes are brought about due to, according to Treasury, the anomaly which arises between the Income Tax Act No. 58 of 1962 (the Act) and some of the Double Tax Agreements (DTA) entered into by South Africa, which could result in those retirement savings that would otherwise be taxable in South Africa (as South African source income) being excluded from our tax net by virtue of the DTA.
To counterbalance this, Treasury has proposed that the Act be amended to deem individuals leaving South Africa (ceasing to be tax resident in South Africa) to have withdrawn from the retirement savings on the day prior to ceasing their
South African tax residency. Where the retirement savings are left in South Africa, the withdrawal tax payment will be deferred until that individual withdraws their retirement savings or when they eventually retire. A tax credit will be provided for the deemed retirement withdrawal tax as calculated when the individual ceased to be a South African tax resident.
While there is still a lot of uncertainty about how this proposal will be implemented, as it currently stands, it would seem as though the tax on the retirement savings will be triggered on the day prior to ceasingtax residency, but would only become payable when the individual actually withdraws the funds. The proposed deferred nature of the tax payment relates to the lack of liquidity should the funds not be withdrawn or even if the fund cannot be withdrawn.
The 2021 Budget may not have brought too many surprises from a wealth tax perspective; however, the continual development of legislation in respect of those looking to move abroad will keep taxpayers on their toes. Therefore, our advice for anyone who works abroad while being an SA tax resident, or who emigrates, is to understand the new rules and complexities to ensure they are not caught off guard by any unintended tax consequences.
