Retirement funds and emigration
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What has already changed?
The concept of formal emigration has been done away with. As of 1 March 2021, the “formal emigration” requirement has been replaced with the “three-year tax residency requirement”.
Previously if you wanted to access your retirement annuity (RA) prior to age 55, you could do so if you applied to the South African Reserve Bank (SARB) for emigration for exchange control purposes. The new test requires that you are no longer tax resident in South Africa, and you have maintained that status for a period of 3 consecutive years. In order to qualify as a non-resident, you would need to show that you are no longer “ordinarily resident” or “physically present” in South Africa. A person is “ordinarily resident” in South Africa if their intention is to return to their permanent home in South Africa. The “physical presence test” requires a person to be in the Republic for:
• More than 91 days in aggregate during the year of assessment and;
• physically present for 915 days in total during the preceding five years of assessment and;
• physically present in the Republic for a period exceeding 91 days in total in each of the five preceding years.
Despite the “physical presence test” above, if a person is not “ordinarily resident” and has been physically outside of the country for a period of 330 days, then they will also not be classified as a tax resident in South Africa.
The new requirement applies to RA’s as well as preservation funds. This is useful for those preservation fund members that have emigrated from South Africa and have already utilised their one withdrawal from their preservation fund. It does mean that emigrating South Africans will have to wait a bit longer to access their funds when they emigrate but it allows those that have left years ago and didn’t go through the “formal emigration” SARB process to now access any funds left behind in an RA or preservation fund.
What will change?
Currently a retirement fund member is only subject to tax when they decide to take cash from their retirement fund on withdrawal or retirement. When that member leaves South Africa the asset is still deemed to be South African sourced and therefore liable for tax in South Africa. The problem for SARS is that the member may also be liable for tax in the country that they are currently residing in - and therefore, any tax treaty between South Africa and such other country may mean that South Africa will end up forfeiting its share of any tax payable.
In order to rectify the above anomaly treasury intends on introducing legislation that will deem the retirement fund value as accrued to the emigrating member the day before they no longer qualify as a South African tax resident. If the emigrating member chooses to defer accessing their retirement fund value to a later retirement date, then such member will receive a tax credit at that stage when they actually pax tax. In this way South Africa seeks to ensure that they receive tax due. It is important to note that this is currently just an intention of treasury and that it is not yet in Bill format. Once proposed in the Taxation Laws Amendment Bill, industry and all other affected persons will be given the opportunity to comment.
As always, your financial advisor and the team at Nedgroup Investments is available to assist with any queries in this regard.