NEWS & OPINION
30 September 2020
DE WET DE VILLIERS Director, AJM Tax
T
he looming threat of prescribed assets remains a controversial topic, leaving many investors (and future pensioners) and taxpayers confused. Concerns that we are heading down the path of retirement savings being used to bail out mismanaged SOEs or to fund a state bank are scaring the living daylights out of many clients with whom I have recently debated the topic. Addressing negative perceptions is critical as fears like this will ultimately lead to greater outflows of capital, an erosion of the tax base and ongoing fiscal and economic instability. Draft Taxation Laws Amendment Bill It is important to connect the dots between, firstly, the new rules pronounced in the Draft Taxation Laws Amendment Bill (DTLAB) on July 31 (which, overly simplified, limits someone who is no longer a tax resident from withdrawing retirement funds for three years); secondly, the proposed changes to regulation 28 of the Pension Funds Act; and finally, the changes already
Limiting access to pension funds for non-residents needs rethinking
announced to exchange controls in the February 2020/21 Budget. Prior to these proposed amendments, individuals could access their pension preservation fund, provident preservation fund and retirement annuity fund upon emigrating for exchange control purposes through the South African Reserve Bank (SARB), or reaching the age of 55. Financial emigration However, as a result of the announcements in the Budget earlier in the year, the concept of ‘financial emigration’ or formal emigration as recognised by the SARB will be phased out to be replaced by a verification process. This removes some of the red tape associated with exchange control compliance. It has always been important to distinguish between tax residence – which follows the facts of a particular case and is often harder to prove – and SARB residency, which was always an election for exchange control purposes. What it now means is that should the DTLAB become law in the current format, you will only be able
to withdraw retirement benefits if you can prove you have been a nontax resident for tax purposes for a continuous three-year period. The big issue is that once you do cease South African tax residency – you would need to make (or should have made) a declaration to SARS in your tax return and this triggers a deemed capital gains event – the Income Tax Act treats this as a deemed disposal of your worldwide assets. Certain assets, notably immovable property in South Africa, is excluded from this so-called ‘exit charge’. As much as 40% of the gain is then included in income and taxed at your marginal rate.
Changes to regulation 28 Which brings us back to concerns that the changes to these rules are aimed at keeping more pension money onshore so that this money can be used to prop up failing state entities, or fund a state-owned bank. The ANC has made it clear in recent interviews that proposed changes to regulation 28 – which limits the extent to which retirement funds may invest in particular assets or in particular asset classes and may in the future require more investment in high-impact development areas of the economy – will not be in the form of a prescription (they plan to make this public by midSeptember). The drive seems to be to get more invested in viable infrastructure projects. So the proposed amendments seem like they will still give the funds the discretion as to Portfolio Modelling where they can invest, but with Presentation & Reports more scope to invest in non-equity,
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private and infrastructure areas of the market. We need to wait and see as discussions with the industry are continuing and all the details must still be ironed out. But if regulation 28 changes do indeed play out as has been explained by the ANC recently, then why limit the ability of those emigrating or moving overseas from accessing their retirement money for three years after they cease to be tax resident? The intention behind this could be as simple as ensuring people do not struggle when they retire; the practical effects have probably not been thought through enough. In my experience, people emigrating often really need to access this money as it helps with emigration and set-up costs, and is often also ploughed into the new business venture offshore. This change may mean someone will think twice about setting up shop offshore. It also raises the prospect of RAs, for instance, losing popularity if it ties the money up. I therefore don’t believe the three-year test is the right one in the circumstances. What we are instead seeing is many people drawing down the amount of cash they can take tax-free from their retirement funds and then taking a tax hit for the rest to get their money offshore. This is an unfortunate reality and the conjecture, uncertainty and pessimism about changes to regulation 28 and possible prescribed assets down the line is not helping. While I do believe many people may be over-reacting, the practical effects of the DTLAB changes to those with a genuine intent to move, or to pursue a real business opportunity, are being unnecessarily limited. Individuals want to be in control of where, how and when they invest and ultimately just want to be able to sleep easier at night. The concern is that all the uncertainty (and speculation) will only lead to an accelerated outflow of capital and a weakening of the local tax base at the worst possible time for South Africa.
CONCERNS THAT WE ARE HEADING DOWN THE PATH OF RETIREMENT SAVINGS BEING USED TO BAIL OUT MISMANAGED SOEs OR TO FUND A STATE BANK ARE SCARING THE LIVING DAYLIGHTS OUT OF MANY CLIENTS
