Ceasing to be a South African (SA) tax resident prior to retirement from a South African retirement fund and becoming a tax resident of another country, may, on payment of a lump sum or monthly pension, cause the interest to be subject to tax in the other country.
In some instances, South Africa forfeits its taxing rights, while the taxpayer benefits from tax concessions. Taxpayers who remain residents only have access to their retirement interest upon retirement and face full tax consequences for withdrawals before that time.
Proposed changes were included in the 2021 legislative cycle to ensure that before an individual ceases to be an SA tax resident, interests in retirement funds would be subject to taxation in South Africa at the tax rates applicable to a withdrawal benefit.
Ceasing to be an SA tax resident and withdrawing interest in the retirement fund from a SA retirement fund before retirement or death would constitute a disposal of interest in a retirement fund on the day before they ceased to be a South African tax resident.
Interest in the retirement fund can become subject to tax applicable to withdrawal benefits, and the tax payment deferred until a withdrawal payment is receivable from the fund. Once payment is received, the tax on the withdrawal benefit is calculated based on the prevailing withdrawal tax tables and tax credit provided at the time they cease to be a tax resident.
Renouncing South African tax residency but retaining the investment in an SA retirement fund until death or retirement would mean the interest in a retirement fund is deemed to have been disposed on the day before ceasing to be a SA tax resident.
The interest in that retirement fund will also be subject to tax applicable to withdrawal benefits. The tax payment, however, is deferred until payments are receivable from the fund. The tax on the payments from the fund will then be calculated based on the prevailing retirement fund lump sum tax tables or in the form of an annuity and the tax credit calculated at date of forfeiture of tax residency.
Tax practitioners viewed bypassing tax treaties with domestic legislation as controversial, as it could potentially result in double taxation for members of retirement funds. Should the Government still wish to address the concern of erosion of the tax base due to emigration, they should be renegotiated accordingly.
Members will therefore be required to withdraw from their retirement funds in South Africa, even if they did not envisage doing so and preferred to retain their retirement savings in South Africa.
Although the public understands the rationale behind the amendment, numerous concerns that the amendment will result in a case of treaty override exist and these are noted by
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