The hits keep on coming for South Africans – at least when it comes to tax. The less said about rugby the better.
Economic struggles, compounded by covid lockdowns and a dwindling tax base, have driven hundreds, if not thousands, of people to consider moving out of the country.
But what is already a laborious and expensive process could be about to get worse.
What now?
Under the existing Income Tax Act No 58 of 1962, there are provisions for an exit tax where a person ceases their South African tax residency.
They are treated as having disposed of their assets, other than immovable property in South Africa, at market value, which triggers a liability.
This does not currently apply to interests in retirement funds – but that could be set to change.
The South African National Treasury published the latest draft tax bills on 28 July 2021, which incorporate proposals made in the 2021 Budget.
The Draft Taxation Laws Amendment Bill (TLAB) features an amendment which proposes a tax on the retirement assets of individuals when they cease South African tax residency.
Changes
The TLAB has proposed, in addition to the existing exit charge, to tax the value of the interest in a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.
This will mean individuals will be hit with a tax on their retirement funds on the day before they cease residency. However, payment of the tax will be deferred until the figure is actually withdrawn.
Jean Du Toit, head of tax technical at Tax Consulting South Africa, said: “This interesting development would, in effect, constitute a treaty override measure put in place by South Africa to avoid the further loss of tax revenue as a result of the large number of individuals ceasing their tax residency in South Africa.
“This is just one of the cascading effects of the widely opposed decision to dispense with the financial emigration process.”
Double taxation?
Anthony Palmer, group commercial director at Carrick Wealth, said to International Adviser: “It is important to note that this is a proposed bill which still requires a public hearing and could change. In essence, I don’t see this as being an additional tax being imposed.
“The same tax will be paid according to the lump sum tax tables after three years of being non-resident. All this proposed bill is doing is locking in the obligation to pay South African Revenue Service (Sars) as when you emigrate and become resident elsewhere, double taxation kicks in and Sars’ right to tax the individual could fall away.
“The government wants to close this loop before the client falls outside their jurisdiction, hence the timing of the tax calculation being the day before becoming non-resident.”
Lindsay Bateman, head of business development at Brooks Macdonald International, told IA: “The South African tax authorities have, for some time now, been experiencing a dwindling tax base and growing fiscal pressures, with unemployment at unsustainable levels, particularly amongst the youth, and pension payments constrained to help move the economy out of a decade of stagnation.
“The recent unrest across many parts of South Africa is further indication of the severe financial pressures ordinary people are facing.
“The move by the treasury to now tax retirement fund interests of individuals when they cease South African tax residency is yet another move to maximise tax income from emigrants before their tax residency moves to their selected new country of residence. With emigration increasing, demands on the state coffers increasing, and high inequality, every opportunity is being taken to maximise tax revenue.
“However, this is likely to stimulate further emigration of the more affluent, skilled and qualified middle classes, who are typically job creators themselves within the economy. South Africans do have some opportunities to structure their financial affairs to legitimately maximise tax efficiency, so taking early advice through a quality, regulated and independent financial advisor is always a prudent approach.”
