Tax emigration and retirement savings – more muddy, more expensive

The latest proposed tax amendments were released on the 29th of July (through the Taxation Laws Amendment Bill and its accompanying memorandum). These proposed amendments contain a number of rules around the tax treatment of retirement savings upon a South African tax emigrating. This has created more complexity in an already complex area and also included a surprising addition which may result in tax emigration being even more costly than it already is.

Previously, a person could withdraw his or her retirement savings immediately when emigrating (which would be subject to tax at the prevailing withdrawal rates), provided that person so-called “financially emigrated” from South Africa, a process which was handled by the Reserve Bank. A person tax emigrates when he or she is able to demonstrate to the South African Revenue Service (SARS) that South Africa is no longer his or her true home and will not be the place that the person returns to after temporary absences. Upon tax emigrating, that person is deemed to have disposed of his or her worldwide assets (excluding South African immovable property) at market value and be subject to capital gains tax on the amount by which that the market value of each asset exceeds the base cost (usually the original cost to acquire that asset), this is the so-called “exit tax”. To date, a person’s interest in his or her retirement product has not been subject to the exit tax.

Since 1 March 2021 the process of “financial emigration” has, however, fallen away and a retirement fund (being a pension preservation fund, provident preservation fund, or retirement annuity fund) may only allow a person who tax emigrates to withdraw their retirement savings after they have been non-tax resident for a continuous period of three years. This puts the power to allow a person to access their retirement monies, following emigration, firmly with the tax regime and not the exchange control regime.

The latest proposed tax law changes now also seek to tax the value of a person’s interest in their retirement product (pension fund, pension preservation fund, provident fund, provident preservation fund, or retirement annuity fund). The value of the interest is to be determined on the day immediately before the date of tax emigration and will be taxed in terms of the tax table for withdrawal from retirement funds). The rationale from National Treasury is that in some cases, a person’s lump sum withdrawal following tax emigration may escape taxation in South Africa due to the application of a double tax treaty with another country (i.e. which would provide exclusive taxing rights to the country where that person is tax emigrating to). Since South Africans who contribute to their retirement savings qualify for a tax deduction, tax neutrality should be achieved – a policy which is perhaps understandable.

However, the fact that an emigrating person can only access his or her retirement savings after three years does create problems – e.g. the mismatch between the timing of the tax event and the time when a person is able to access the funds needed to settle the tax liability. National Treasury has now addressed these concerns by deferring the liability to pay the tax on the retirement product to when a person is able to access the funds (e.g. after three years or upon actual retirement). Something unexpected however was inserted in the proposed amendments.

The tax calculated on the date of tax emigration will be increased by an amount of interest (the SARS prescribed rate currently set at 7%) imposed from the date when the tax is triggered (i.e. on the day before tax emigration) until the time when a person settles the tax (e.g. either after three years when the individual can access the withdrawal or later, when the person retires). The rationale for this is, presumably, that the retirement fund will continue to grow over the three years to withdrawal.

A person tax emigrating is 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 or her retirement funds and to settle that liability. What could further compound the situation, is that the value of a person’s retirement interest could well decline over the three-year (or longer) period. A person could thus have a tax liability, plus interest, on an amount which is significantly less than what that person is able to finally receive. It is possible that such a proposal may be unconstitutional, which is already being looked at by the tax community.

We expect some backlash on this when comments are solicited from National Treasury.

It is clear that the government is doing what it can to mitigate the risk of what seems to be an increasing trend of tax paying South Africans emigrating from South Africa. What’s not obvious is whether these proposals will necessarily achieve that aim. What is clear, however, is that tax emigrating from South Africa is becoming increasingly complex and costly. If you are planning on emigrating or want to know about the potential tax effects, click below to contact us.

Tax emigration

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