Friday, January 21

Tax Proposal Focuses Retirement Savings Decisions

South Africans wishing to emigrate will need to carefully consider the latest proposal on taxing retirement funds and how it may affect them.

In recent years, several far-reaching changes have been made to the emigration process and now retirement savings have been added.


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Gavin Duffy, a partner at PwC, says the timing of the latest proposal is quite unfortunate and only adds to the panic of South Africans who have already left, or are considering moving, either in the medium term or permanently.

Double tax

In the latest proposal, published in the July Tax Law Amendment Bill, the National Treasury seeks to guarantee South Africa’s tax rights on pension fund payments in all cases.

The “problem” he wants to address are cases where the country in which the South African is a tax resident has the exclusive right to tax retirement fund payments in terms of a double taxation arrangement.

To ensure South Africa’s tax rights, the Treasury proposed that on the day before the individual ceases tax residence in South Africa, the taxpayer shall be “deemed to have withdrawn” from all South African retirement funds.

The proposed withdrawal considered will be effective as of March of next year.

But as of March 1 of this year, South Africans must be tax nonresidents for three continuous years before the retirement annuity fund and the conservation fund (where the only retirement option has been taken) can allow withdrawals. . This means that a tax is triggered on a considered withdrawal and interest will be charged during the three-year waiting period.

Read: Is the new exit tax constitutional?

Duffy expressed concern about the potential for double taxation. It explains that the Organization for Economic Cooperation and Development establishes in the Model Tax Agreement that payments from retirement funds are taxable only in the country where the person is a tax resident. South Africa has negotiated with these countries for exclusive tax rights.

Countries that have exclusive tax rights in their double tax agreements with South Africa include the United Kingdom, Australia, New Zealand, China, Hong Kong, Denmark, Germany, Italy, Portugal, and Spain.

In terms of the new proposed change, retirement savings and tax-deferred interest on debt will now also be taxed in South Africa.

Duffy says the draft bill does not state how the Treasury will deal with double taxation. The purpose of double taxation agreements is to avoid double taxation.

Read: Sars Attack on South African Taxpayers Abroad

“With double tax treaties, two countries sit down and negotiate in good faith how the different scenarios can be addressed. South Africa is now saying that it does not like the treaty provision that they have negotiated. Now he wants to introduce additional legislation that raises a lot of problems. ”

Careful consideration

Duffy advises people planning to leave SA to carefully consider where they are going and what the provisions of double taxation agreements are. This will allow them to make meaningful decisions about what to do with their retirement savings.

Dawie Klopper, an investment economist at PSG, says PSG continues to encourage people to save as much on retirement products as possible to take full advantage of the tax benefits. However, government signals and messages around retirement savings can discourage people from saving on these products, and that will be detrimental to taxpayers and the government, he says.

People considering redirecting their savings need to understand the tax consequences. A maximum of 27.5% of taxable income or compensation (whichever is greater), and no more than R350,000, is tax deductible in a tax year.

“There is a risk that your discretionary investment income tax may be more than you may be paying when you are in a retirement savings product.

“The returns will have to be extraordinary to make up for the tax benefit you will lose,” says Klopper.

He adds that people who do consider increasing their discretionary savings (rather than retirement savings) should take into account the self-discipline necessary to not access these savings for living expenses or luxury items.

“Young people have to ask themselves what the world will be like in 15 years. If they save only in discretionary investments, they still have to save regularly and have to save more to make up for the loss of tax benefit. ”

Klopper says the government’s approach to retirement savings will determine how South Africans think about their investments. “If you don’t have the assurance from the government that you support a market-oriented economy, you shouldn’t be naive.”

Duffy also worries that people will make hasty decisions that will change their lives out of fear of the proposed legislation that is still a real unknown.

Rethink the proposal

Duffy thinks that the tax authority and the Treasury may need to reflect on his proposal.

“I’m not convinced that much thought has been given to the impact of the various double taxation agreements and the myriad of scenarios that arise under it.”

He says that the Treasury assumes that a taxpayer will know when they will cease to be a tax resident, and also assumes that a fund manager will know.

Read: Cessation of Tax Residence in SA: What You Need to Know

“It seems as if the Treasury assumes that each case of cessation of tax residence is someone who permanently leaves SA, but that is not the case.”

Someone may be performing multiple assignments and end up ceasing to reside for tax two or three times during their life. That means they have a considered withdrawal when they cease tax residence, resume tax residence, and cease again.

This scenario has clearly not been addressed.

Duffy also says that even if the proposal could be made conceptually, it can become an administrative nightmare for taxpayers or fund managers to track the estimated withdrawal and tax calculation and recalculation years later.

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