Big pension problem for South African expats
Martin Bezuidenhout and Chavaughn Phillips from Tax Consulting SA say there is a massive problem for South Africans living overseas who want to claim their pension benefits.
“Expatriates are often under the impression that they need to wait three years before they can formalise their non-residency status,” the experts said.
“This can be due to various reasons such as misunderstanding the legislative amendments, advisors wanting to monetise on the withdrawal of these retirement funds and the subsequent remittance offshore or lack of professional guidance.”
The experts said that the confusion was likely due to the introduction of the 3-year lock-up rule, which started in March 2021.
Before introduction, individuals who ended their tax residency and confirmed their emigration with the South African Reserve Bank (SARB) could immediately remove their retirement funds from South Africa.
However, since its introduction in March 2021, individuals who wanted to end their tax residency and confirm their emigration status with the SARB could immediately withdraw their benefits from South Africa.
These individual’s retirement benefits are locked in for a minimum period of three years, after which they can be fully withdrawn (subject to lump sum tax implications).
However, this does not mean that an individual who wishes to withdraw their retirement interest should postpone their formation of non-residency until the three-year period has ended.
This is a risky approach as tax residents in South Africa are taxable on their worldwide income, while non-residents are only taxable on their South African sourced income.
“This means that tax residents should declare their worldwide income to SARS and then claim the specific exemption if they meet the requirements,” the experts said.
Ending South African tax residency
South Africans can end their tax residency by either proving to SARS that they no longer reside in South Africa or via an application to the Double Taxation Agreement (DTA).
“Cessation through the application of the ordinarily resident test requires the individual to prove to SARS objectively that they intend to reside outside of South Africa permanently,” the experts said.
“In other words, if you have the intention to reside abroad permanently and the intention can objectively be substantiated, you will break the ordinarily resident test and will qualify to cease your tax residency.”
“This once-off process requires documentary evidence substantiating their intention to reside abroad to meet the qualifying criteria.”
Regarding DTA relief, South Africans must follow specific steps and provide evidence to show that they are no longer a resident of South Africa, such as a foreign tax residency certificate.
This relief is claimed annually and is the best option for someone who wants to live overseas for several years but does not wish to live there permanently.
The Danger of Waiting
The experts said that any South African who has not formalised their non-residency status in South Africa will be required to declare their worldwide income to SARS while doing their tax returns in South Africa.
Not declaring this income as a resident is seen as office.
“Further, there might be a risk of double tax exposure, as the foreign employment exemption, which is limited to R1,250,000, only applies to employment income. Many South Africans living abroad earn above this threshold and are therefore at risk,” they said
To ensure compliance, the SARS issues a confirmation letter to taxpayers once they meet the relevant criteria to be seen as a non-resident.
This letter and ancillary documentation are required to ensure the full withdrawal of someone’s retirement funds before maturity.
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