(Tax Laws Amendment Bill 2020)
Currently, the definitions of “pension preservation fund”, “provident preservation fund” and “retirement annuity fund” in section 1 of the Act make provision for a payment of lump sum benefits when a member of a pension preservation, provident preservation or retirement annuity fund withdraws from the retirement fund due to that member emigrating from South Africa, and such emigration is recognised by the South African Reserve Bank (SARB) for exchange control purposes.
The South African government will be modernising the foreign exchange control system. As a result, a new capital flow management system will be put in place. This new system will move from a “negative list” system to one where all foreign-currency transactions will be allowed, other than those contained on the risk-based list of capital flow measures. In respect of individuals, one of the changes to be implemented during modernisation of the foreign exchange control system is the phasing out of the concept of “emigration” for exchange control purposes (financial emigration). The phasing out of this concept will have a direct impact on the application of the tax rules because the tax legislation currently makes provision for a payment of lump sum benefits when a member, as defined above, emigrates from South Africa and such emigration is recognised by the SARB for exchange control purposes.
As such, a new test was inserted in the Act which will make provision for the payment of lump sum benefits when a member ceases to be a South African tax resident (as defined in the Act), and such member has remained non-tax resident for at least three consecutive years or longer.
The proposed amendments will come into operation on 1 March 2021 and was approved by Parliament in October 2020 and promulgated on 20 January 2021 and is only applicable to RA’s and preservers where one withdrawal has been taken.
At present, to get access to retirement annuity fund and provident preservation fund benefits prior to age 55, members either have to prove that they are disabled or have formally/financially emigrated. ‘Relocation’, like most South Africans do, does not qualify.
Successful emigration applicants, receive a letter from the SARB confirming that it notes the application for emigration once the prescribed process was followed, including e.g. handing in credit cards and full and final settlement of tax affairs. SARS accepts this letter as proof of the intended shedding of the applicants SA tax residency. Relocation, does not require such a letter or process, so the burden of prove to SARS that of “ordinarily resident” rests with individuals. SARS does not have an administration system to respond to such requests for confirmation – a practical problem.
The above changes does not affect pension and provident funds, as if the member resigns from the fund due to resigning from their employment to leave the country, they will be able to cash in the fund, pay the withdrawal tax and take their money out the country, subject to meeting the foreign exchange control requirements.
It seems that SARS wants time to build an administration system to cope with requests for confirmation that a taxpayer has shed his/her SA tax residency. Perhaps the 3 year period also dissuades people from asking SARS for confirmation, when they have deliberately relocated for only a short period of time merely to gain access to lump sums from the above funds prior to age 55. There is a list of factors SARS looks at when deciding whether someone is really non-resident – SARS Interpretation Note 3, issue 2, paragraph 4.2.
Upon emigration or relocation, withdrawal from the above funds prior to age 55, will trigger tax payment on the punitive withdrawal scale – only the first R25k will be tax-free, and up to 36% tax above R990k lump sum.
|TAXABLE INCOME (R)||RATE OF TAX (R)|
|0 – 25,000||0% of taxable income|
|25,001 – 660,000||18% of taxable income above 25,000|
|660,001 – 990,000||114,300 + 27% of taxable income above 660,000|
|990,001 and above||203,400 + 36% of taxable income above 990,000|
There are easy solutions but appropriate advice must be obtained before emotional decisions are taken. Most clients who find themselves living outside South Africa, should wait until age 55, then retire from the above funds, take up to 1/3rd as a lump sum, and use the 2/3rds to buy a living annuity and remember that up to 17.5% of the value can be drawn down per annum. The benefits can be paid either into a SA bank account (after tax at source), or be paid into a foreign bank account (provided proof of emigration/non-residency was lodged as described above). Remember the other options are to use the SDA or the FIA to remit money from a SA bank account.