In the National Treasury’s latest published Draft Tax Bills, which incorporates the tax proposals made in the 2021 Budget, the amendment proposes a particularly worrying amendment which may upend taxpayers’ carefully planned retirement. The Draft Taxation Laws Amendment Bill (TLAB) proposes an additional “exit tax” to tax retirement fund interests of individuals when they cease South African tax residency. This proposed amendment, due to come into operation on 1 March 2022, would be a further blow to emigrating South Africans wanting to cease their tax residency, following on from the three-year lock-in rule imposed on retirement annuities earlier this year.
It is important to note that the Income Tax Act No. 58 of 1962 (the Act) already makes provisions for an exit tax where a person ceases their South African tax residency. The Act creates a fiction whereby a person who ceases residency is treated as having disposed of their assets (other than immovable property situated in South Africa) at market value, triggering a tax liability. But this section does not apply to interests in retirement funds.
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In the proposed amendment, the Draft Taxation Laws Amendment Bill (TLAB) wants to add 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.
It is proposed to create a similar fiction under a new section in the Act where an individual will be deemed to have withdrawn from their retirement fund on the day before they cease residency. However, payment of the tax will be deferred until the amount is actually receivable from the fund. The tax will be levied on the value of the interest on the day prior to ceasing residency and will be calculated in terms of the lump sum tax tables prevailing at the time of payment.
In other words, the tax is triggered when the person ceases residency, but only becomes payable when the amount is actually withdrawn. It seems the ANC Government realised that this measure of relief is necessary, as it would have been burdensome to pay both exit charges concurrently.
This Tax Bill which effectively proposes an additional exit tax on emigrating South Africans is being staunchly challenged by The South African Expatriate Petition Group, led by Barry Pretorius. They successfully managed a petition via their Facebook group in 2018, which was signed by 14,000 people with 3,400 technical submissions made to parliament, which stopped Article 10 of the SA Tax Law from being totally repealed.
They, (Tax Consulting South Africa) have gained the support of over 100 tax attorneys and consultants, and claim their submission will be bolstered by the input of the wider expatriate community. If you would like to add your comments, please send them to Rea Moloi on [email protected]. All information shared will be treated as confidential and governed by attorney privilege. Your name will not be used in the submission to National Treasury unless specifically requested by you.
When ceasing their South African tax residency, taxpayers are already subject to an “exit tax,” which forms part of the emigration process, which applies in the event of a cessation of tax residency, and provides that a taxpayer will be deemed to have disposed certain qualifying assets on the day before ceasing tax residency. This event triggers a tax liability in respect of the growth on these assets before the taxpayer leaves the South African tax net permanently.
The assets currently subject to the ‘exit tax’ are:
- Foreign fixed property;
- Shares;
- Unit trusts and other similar investments;
- Trusts – depending on how they are set up and the assets they hold.
The assets currently excluded for the ‘exit tax’ are:
- South African fixed property held in the taxpayer’s name;
- Retirement interests held in pension, provident and retirement annuity funds;
- Cash;
- Personal use assets.
The Draft Taxation Laws Amendment Bill now proposes, 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.
It is proposed to create a similar occurrence to the deemed disposal under a new section in the Act (section 9HC) where an individual will be deemed to have withdrawn from their retirement fund on the day before they cease residency.
The proposed amendment does state that the tax is triggered upon ceasing tax residency, however, the payment of the tax will be deferred until actual withdrawal from the fund. The tax will be levied on the value of the interest on the day prior to ceasing residency, but will be calculated in terms of the lump sum tax tables prevailing at the time of payment.
What the ANC government fails to realise is the burden of the unknown rate of the future lump sum tax tables, that the actual payment would be made on. These rates have remained unchanged for several years and ANC Government may view these as low-hanging fruit for an increase to drum up additional revenue in future.
The existing three-year lock-in rule imposed on retirement annuities earlier this year, stated that individuals must be non-residents for tax purposes for three consecutive years before being allowed to withdraw their funds in full. This creates a mismatch between withdrawal and the actual date of ceasing tax residency, which necessitated this latest amendment.
National Treasury has allowed for submissions opposing the amendment to be put through by the 28th of August 2021.
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