Following the amendments included in the recently published Taxation Laws Amendment Act 23 of 2020, which alter the rules regarding withdrawal of retirement benefits upon emigration from 1 March 2021, it was announced that other provisions dealing with retirement benefits may be amended. Specifically, the Budget identifies a potential anomaly arising in the context of a person ceasing to be a South African tax resident, but retaining her investment in a South African retirement fund and only withdrawing from the retirement fund when she passes away or retires from employment.
When an individual ceases to be a South African tax resident, retirement funds are not always subject to withdrawal tax in terms of the Income Tax Act. Section 9(2)(i) of the Income Tax Act is important in this context, which section states the following regarding the source of a lump sum, pension or annuity payable by a retirement fund:
An amount is received by or accrues to a person within the Republic if that amountconstitutes a lump sum, a pension or an annuity payable by a pension fund, pension preservation fund, provident fund or provident preservation fund and the services in respect of which that amount is so received or accrues were rendered within the Republic: Provided that if the amount is received or accrues in respect of services which were rendered partly within and partly outside the Republic, only so much of that amount as bears to the total of that amount the same ratio as the period during which the services were rendered in the Republic bears to the total period during which the services were rendered must be regarded as having been received by or accrued to the person from a source within the Republic
According to the Budget, the effect of section 9(2)(i) is that amounts from retirement funds are deemed to be from a South African source, even though the individual receiving the retirement benefit is no longer a South African tax resident.
In the context of an individual who has emigrated, when that individual withdraws from the retirement fund, the retirement fund interest will be subject to tax in the other country as the individual will, in terms of the tax treaty between South Africa and the other country, be regarded as a tax resident in the other country. The provisions of the tax treaty between South Africa and the new resident country may result in South Africa forfeiting its taxing rights.
This appears to be the case if one considers, for example, the pension provisions in some of South Africas double tax treaties with other countries, many of which are based on the OECDs Articles of the Model Convention with respect to Taxes on Income and on Capital (OECD Model Convention).
Article 18 of the OECD Model Convention states that subject to the provisions dealing with remuneration received in respect of government service (article 19 of the OECD Model Convention), pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.
To address the anomaly whereby South Africa risks forfeiting its taxing rights despite the deemed source rule in section 9(2)(i), government proposes changing the legislation as follows:
- When the individual ceases to be a South African tax resident, the retirement fund interest will form part of the assets that are subject to retirement withdrawal t In other words, the individual will be deemed to have withdrawn from the fund on the day before she ceases to be a
South African tax resident.
- If the individual ceases to be a South African tax resident but leaves her investment in a South African retirement fund and only withdraws from the retirement fund when she dies or retires from employment, the retirement withdrawal tax (including the associated interest) payment will be deferred until payments are received from the retirement fund or due to retirement.
- When the individual eventually receives payments from the fund, the tax will be calculated based on the prevailing lump sum tables or in the form of an
- 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.
Author: Louis Botha