You will not be taxed in South Africa on a pension that you accumulated while you worked outside the country, although this exemption is subject to several qualifications.
In November, the South African Revenue Service (SARS) issued Binding General Ruling 25, which aims to resolve the disputes that have arisen between SARS and some taxpayers whose pensions are partly or entirely the result of employment outside the country.
The ruling means that a pension that accrues for services rendered outside South Africa by a South African resident will generally not be subject to tax in this country, the South African Institute of Chartered Accountants (Saica) says in a statement. If the services were rendered both in South Africa and abroad, the portion of the pension to qualify for the exemption will be calculated using a formula where the period of employment abroad is a ratio of the total period of employment.
Marika Muller, the deputy spokesperson for SARS, says existing disputes over pensions from foreign employment will be dealt with according to the ruling.
A section of the Income Tax Act exempts from tax any pension received by or accrued to a resident from a source outside South Africa for past employment outside the country, Jenny Klein, a tax manager at ENSAfrica, says.
South Africa taxes the world-wide income of its residents, so payments received for services rendered outside the country are included in their gross income. But these payments may subsequently be excluded from their taxable income in terms of any available exemptions, Klein says.
“Gross income” is your total income before taking exemptions, deductions or allowances into account, whereas “taxable income” is your income after tax exemptions, deductions or allowances.
Over the past few years, SARS has taken the view that, for the exemption to apply, “source outside South Africa” meant that the services must have been rendered outside the Republic and the fund that pays the pension must be located outside the country, Klein says. In other words, if you remained a member of a South African-registered fund while working abroad, none of your pension benefits qualified for the exemption.
Tax experts say the ruling now confirms what taxpayers and tax practitioners have always regarded as the status quo: that the exemption depends on the “originating cause” (namely, employment abroad) of the pension benefit and not where the pension fund that pays the benefit is domiciled.
Not every payout that you might think is a “pension benefit” qualifies in terms of the exemption.
The exemption currently applies only to recurring payments (a monthly pension); it does not apply to lump-sum payments, Muller says. In other words, the formula cannot be used to exempt any part of the up to one-third of your retirement savings that you can take as cash from a pension fund or the lump-sum payout from a provident fund.
However, once the Taxation Laws Amendment Bill of 2014 is passed into law, the exclusion of lump sums will, from March 2015, fall away. The bill proposes an amendment to the Income Tax Act so that its provisions dealing with pension benefits apply equally to lump-sum payouts and to annuities. Once the amendment becomes law, the exemption will apply to lump sums taken both on retirement and on early withdrawal, Muller says.
However, SARS says the exemption does not apply to retirement annuities (RAs). Piet Nel, Saica’s project director for tax, says South Africans who have to make their own retirement-funding arrangements while they are working abroad should take this into consideration, because, unless RAs are brought within the exemption, foreign pensions derived from contributions to an RA could be subject to tax in this country. If you are seconded abroad by your employer, it may be in your interests to negotiate to be able to keep contributing to your employer’s occupational fund.
The exemption also does not apply to state employees who are seconded abroad, Muller says.
Nel says you should bear in mind that South Africa has double-taxation agreements with some countries and some of these may specifically determine that a pension benefit is taxed in a way that conflicts with the exemption in the Income Tax Act. In these cases, he says, the provisions in the tax treaty override the exemption.
Asked what documentation SARS might ask you to submit as proof that work you did outside South Africa gave rise to a portion or all of a pension, Muller says your retirement fund would generally certify the place where services were rendered.
Muller says the income tax return already makes provision for the declaration of pension payments that relate to services rendered outside South Africa. The source code on the IRP5 certificate that relates to the portion of the pension that qualifies for exemption is 3652. The source code that relates to the taxable portion of the pension is 3603.
SARS spokesperson Adrian Lackay says taxpayers who receive amounts that qualify for the exemption must declare the non-taxable portion on the income tax return under the heading “Amounts considered non-taxable”. Thereunder, the amount that qualifies for exemption can be reflected as “Foreign pension”, whether the fund is registered in South Africa or another country.
Taxpayers must be in a position to substantiate that the exemption applies to them, Lackay says. It is advisable that you obtain proof of services rendered outside South Africa and that the pension relates to the services or employment outside South Africa.
“It is advisable that all possible documentation that can prove the connection between the foreign services and pension be retained,” Lackay says.
Pieter Faber, the technical executive of tax law and policy at the South African Institute of Tax Professionals, says it is no easy matter to tax fairly pension benefits arising from foreign employment. For example, contributions to South African retirement funds are tax-deductible within certain limits, but you typically pay tax on the benefits. If you enjoy the contribution when you contribute and an exemption when you receive the benefit arising from foreign employment, this could result in a loss of revenue for the government.
However, he says it is also inequitable to tax a pension received by a resident if the resident – such as an immigrant to South Africa – received no tax relief in South Africa on his or her contributions.
Faber says National Treasury and SARS are examining the issue of “cross-border” pensions. He says that, because a blanket exemption can result in anomalies and because it may be difficult for taxpayers to prove which portion of their pensionable income was derived from foreign employment, Treasury may decide to scrap the exemption and find another way to grant tax relief to people who receive these pensions.
In the 2014 Budget Review, Treasury says: “South African residents working abroad and foreign residents working in South Africa regularly contribute to local and foreign pension funds. With overall retirement reform now in effect, cross-border pension issues need to be reconsidered. Given the complexity of the issues involved, it is proposed that the review take place over two years, with extensive consultation.”