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THE GOVERNMENT has proposed amendments to the tax legislation that could have significant implications for pension fund members who want to take their savings offshore.
The National Treasury yesterday proposed changes that could allow the SA Revenue Service (Sars) to subject the interests in retirement funds to taxation when an individual ceases to be a South African tax resident.
Currently, South Africa can forfeit its taxing rights when individuals become tax residents of another country before or when they retire.
Briefing Parliament’s Standing Committee on Finance, the Treasury said the rules had been changed last year and a three-year moratorium had been implemented for persons who were no longer South African tax residents, before they could access their retirement fund savings.
The Treasury’s chief director for economic tax analysis, Chris Axelson, said that according to double-taxation agreements, that money, if taken, might not be taxable in South Africa at all.
Axelson, however, said this was different to individuals who stay as South African tax residents, who can access their money only once they are aged 55 or more.
“So individuals would have received a full upfront tax deduction on the amount going into the retirement fund. They would have received tax-free growth on the investments in the retirement fund, and when they leave the country, they wouldn’t be paying any tax either,” Axelson said.
“This really does get rid of our taxing rights on those types of assets, so we are trying to fix that.
“The proposal we are saying is that when an individual ceases to be a South African tax resident, we will deem a tax to be paid on the day before they cease to be a resident.
“But we do not actually ask for the tax to be paid at that time, so it can be deferred. It’s the same regime or the same treatment that you do for capital gains tax.”
As a result, Axelson said the Treasury proposed a two-pronged approach both for withdrawals and the amounts taken on retirement.
“If an individual were to withdraw before retirement or death, the individual will be deemed to have disposed of his or her interest in that retirement fund the day before they cease to be a South African tax resident, and the interest will form part of the assets of that individual, and they won’t need to make a payment,” he said.
“However, if they do actually make a withdrawal after three years of being a non-tax resident, then they will need to pay a tax that was applicable on that amount on the day before they ceased, using the prevailing withdrawal tax tables at the time, plus interest.”
Alexander Forbes’s head of technical advice on investment, Jenny Gordon, said the drafting of the proposed section 9HC was inadequate and did not give effect to the intention in the explanatory memorandum. Therefore, Gordon said, it was unlikely to be implemented with success on March 1, 2022.
“The legislation that would be required to give effect to this type of provision is complex, and many other provisions of the Income Tax Act, the Tax Administration Act and the Pension Funds Act would require amendment at the same time, in addition to Sars processes. This has not been proposed in the draft bill,” Gordon said.
“We are engaging with the regulators in written submissions and hearings on the draft bill, with the intention of reaching a consensus for a workable solution.”