SA proposes retirement fund exit charge when ceasing residency

The National Treasury and South African Revenue Service (SARS) published the 2021 draft Taxation Laws Amendment Bill (TLAB) on 28 July, which includes proposed changes in relation to the tax treatment of an individual’s interest in a pension or retirement fund upon the cessation of their South African residency.

Under section 9H(2) of the Income Tax Act (ITA), when an individual ceases to be tax resident in South African during any year of assessment, an automatic capital gains tax charge is calculated on certain assets held by that individual. Currently an individual’s membership interest in a retirement fund is not subject to South African tax under to the provisions of certain double tax agreements (DTAs) concluded between South Africa and other countries.

The National Treasury is therefore proposing to insert wording into section 9H to clarify that the deemed disposal rule in 9H(2) will not apply in respect of an asset of a person ceasing residency where that asset constitutes any amount representing the value of the interest in any retirement fund, as well as the insertion of a new section 9HC in the ITA to provide specifically for the “disposal of retirement fund interest[s] on change of residence”.

If approved, this means that individuals ceasing to be tax resident in South Africa will be exposed to South African tax on the value of their retirement fund interest(s), irrespective of whether they withdraw or retain their interest in a South African retirement fund upon ceasing residency.

In either case, the treatment of an individual’s retirement fund interest will be as follows:

• If an individual, upon ceasing residency, withdraws their interest prior to retirement or death, then he / she will be deemed to have withdrawn from the retirement fund on the day before they cease to be a South African tax resident.

  The interest in the retirement fund will therefore form part of the assets of the individual and will be subject to the tax applicable to withdrawal benefits, although the tax payment, including associated interest, will be deferred until a payment is received from the retirement fund and will then be calculated based on the prevailing withdrawal tax rates. A tax credit will be provided for the deemed tax as calculated when the individual ceased to be a South African tax resident.

• If an individual, upon ceasing residency, retains their interest and only withdraws upon retirement or death, then then he / she will be deemed to have withdrawn from the retirement fund on the day before he / she ceases to be a South African tax resident.

  The interest in the retirement fund will therefore form part of the assets of the individual and will be subject to the tax applicable to withdrawal benefits, although the tax payment, including associated interest, will be deferred until a payment is received from the retirement fund and will be calculated based on the prevailing retirement fund lump sum tax tables or in the form of an annuity. A tax credit will be provided for the deemed tax as calculated when the individual ceased to be a South African tax resident.

According to the proposal, an individual who is ceasing to be tax resident in South Africa will be responsible for ensuring that a valuation of the interest in the retirement fund is obtained on the day before their cessation of residency and for notifying SARS that they have ceased South African tax residency.

The deferral of the tax payment to when payment is receivable from the retirement fund is in line with the recent changes to the ITA permitting individuals that are ceasing residency to withdraw lump sum amounts from their retirement funds if they have remained non-tax resident for at least three years on or after 1 March 2021.

The proposed amendments, which are currently the subject of a consultation, are intended to come into force on 1 March 2022 and will apply in respect of any year of assessment commencing on or after that date. It is to be hoped that they will be found to be inconsistent with some of South Africa’s DTAs and therefore in contravention of South Africa’s obligations under international law.