Thabiso is a young up-and-coming social media expert. She has excelled in the digital sphere and built a reputation for herself as the go-to social media manager for leading brands in South Africa. Following the advice of a financial advisor, she has been contributing aggressively towards a retirement annuity and a pension fund for the last 10 years.
A German industrialist headhunts Thabiso and gives her a once-in-a-lifetime offer to manage all their social platforms. She grabs the opportunity and begins working remotely for the new employer. She is set to leave South Africa in June 2022 to live in Germany on a permanent basis.
Thabiso intends on formally ceasing her tax residency through SARS, then to obtain a tax clearance status for emigration. Her plans are to keep the retirement annuity in SA until its maturity, but to encash her pension fund savings and to remit these funds abroad upon emigration to diversify her retirement portfolio.
However, once the Draft Tax Amendment Bill has been approved, Thabiso will have to contend with the three-year lock-in rule, as well as the new additional exit tax that will be imposed on retirement funds.
How exactly will Thabiso be affected by the proposed change on retirement funds in terms of the Draft Tax Amendment Bill?
Thabiso will conclude her financial emigration after the change in the law affecting retirement funds in March 2021. This means, before she can get access to her pension savings, she must be outside of South Africa and a confirmed tax resident of another country for a consecutive period of three years.
Second to being affected by the three-year lock-in rule, Thabiso will also face an additional exit tax against her retirement funds in the following way:
Should the proposed amendment be promulgated into law, as she will be emigrating after the effective date of 1 March 2022, the retirement annuity as well as the pension fund will both be deemed to have been withdrawn from the fund on the day before they cease to be a South African tax resident, as envisaged in the Act. However, the payment of this tax on both retirement funds 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.
Therefore, the tax on the pension fund will be based on the value of the interest on the day of the deemed withdrawal but will only be due upon early encashment / withdrawal. Similarly, the tax on the RA will be based on the value of the interest on the day of the deemed withdrawal but will only be due upon early encashment. As the tax on the RA will be calculated in terms of the lump sum tax tables prevailing at the time of payment, it means that the taxpayer may potentially be exposed to a higher tax rate in future and therefore prompting them to encash their funds sooner rather than later, which will not be allowed based on the three-year lock-in rule.
When considering legislation as it currently stands in conjunction with the double tax treaties, where they are a tax resident of another jurisdiction during the time of withdrawal, their country of residence would have the exclusive taxing rights in respect of the retirement fund (and potentially being taxed at a lower rate). However, with the proposed amendment, South Africa would effectively get around the double tax treaty of the country of residence, which means that the taxpayer may effectively be taxed in both countries, albeit South Africa will provide a credit in this respect, while they wait for the three-year lock-in rule to conclude itself.
This hurdle will seriously impede Thabiso’s financial position when living and working in a different country. It will also delay her efforts to diversify her portfolio based on the possibilities of her new residency status.
