Plans laid out by the South African Treasury to impose a withdrawal tax on retirement interest to those who no longer reside in the country have been shelved.
The move seems to stem from the fact that the Netherlands encountered problems when it tried to introduce a domestic tax provision, as its government was legally challenged for bypassing tax treaties.
The South African Treasury said it wanted to avoid a similar situation, because this would have seen expats potentially subjected to double taxation.
Lindsay Bateman, head of business development at Brooks Macdonald International, told International Adviser: “Former and current South African tax residents will no doubt have been watching developments initiated by the National Treasury team in South Africa around charging a tax on withdrawals of retirement funds for those individuals who are no longer tax resident.
“The recent withdrawal of this proposal is clearly a positive step, otherwise some emigrants or former residents could have faced tax obligations on the same income from both the South African Revenue Service (Sars), as well as their current place of tax domicile.
“This would not only be to the financial detriment of taxpayers who have ‘done the right thing’ and built up their retirement savings, but equally potentially breach existing international tax treaties.”
Seek financial advice
But Bateman warned that those who recently decided to emigrate may still get caught in the taxman’s net when it comes to their retirement interest.
“South Africans who have emigrated of late, and retain retirement funds in South Africa, or those planning or considering emigration, should seek independent advice in this regard, and ensure that they are not caught unawares, as the intention to derive tax on such withdrawals by the South African authorities remains very much a stated objective.
“South Africans continue to actively diversify wealth internationally, and seeking advice through independent financial advisers, or specialist emigration firms certainly helps ensure that the financial implications from externalising wealth are well understood, and unpleasant or expensive mistakes can then be avoided.”
Not so fast
But Paul Roper, director at VG, told IA that the South African government may still try to bring in some aspects of the now-frozen plans.
“The reality is that the Treasury has to find a way to close the tax gap, whether it is taxing the wealthy or finding another way to fund the country’s budgeted expenses.
“The notion of taxing withdrawals of retirement interest for individuals who are no longer tax residents in South Africa is but one idea. This has been put on hold, but only as an interim measure.
“The fact that it is a temporary withdrawal must invariably mean that it will rear its head at a later date. That being the case, we need to consider the impact on those that have already left the country and those who plan to do so.”
What consequences could the introduction of a similar ‘exit tax’ mean for current expats and for those looking to leave South Africa?
Roper continued: “The OECD Model Tax Convention, and most double tax treaties, gives the right of taxation to the country with which the individual has the closest relationship – ie where they are resident. This income from retirement funds should rightly be taxed in the country where the person is resident.
“For South Africa to try to tax this is anathema to principles of international tax. It will also give rise to double taxation: Once in terms of the deeming provision when the money is actually paid to the retiree; and again, by the new country.
“It is unlikely to happen any time soon as it means that South Africa will have to renegotiate all the double tax agreements.”
Expats-to-be to suffer?
Things are probably going to change for those that haven’t expatriated just yet, Roper said, as they might be forced to cash in their retirement funds before leaving the country.
“They will pay more tax on a withdrawal as opposed to a retirement; and lumping these funds in with exiting capital, with the deemed trigger for capital gains tax on an exit will not help. On the plus side, if withdrawn, the capital funds then become voluntary and these can then be taken out of the country.”
But Roper believes this might also become a double-edged sword, and not just for retirees.
“There is a larger issue here though,” he said. “Less than 5% of South Africans can retire financially secure. Their retirement savings via traditional retirement funds represent a key ingredient of their retirement planning.
“This is assisted by employers as typically the employer and employee make contributions to retirement funds, during the employees working career.
“If there is this sword of Damocles that the retirement savings will be undermined by artificially introducing a capital gains or other tax on an exit from the country, fewer employees will want to participate, and this will further undermine the situation and the percentage above will become even lower,” he added.
