Leaving South Africa?

When you cease to be a tax resident of South Africa, you are deemed to have sold your worldwide assets on the day before you cease to be a tax resident. This triggers a capital gains tax (CGT) event, which is often referred to as “exit tax”.

Currently, your interest in a South African retirement fund is not subject to this exit tax.

One of the key announcements in the 2021 Budget on 24 February 2021 is a proposed exit tax on retirement fund interests where an individual ceases to be resident for tax purposes.

The proposal is motivated by the fact that individuals who cease to be South African tax residents often becomes a tax resident of another country where a tax treaty provides the taxing right to the foreign resident country, resulting in South Africa forfeiting its taxing rights, in this case, on the withdrawal from a retirement fund.

To address this anomaly, government proposes an exit tax be calculated on an interest in a South African retirement fund at the time that the member ceases to be resident for tax purposes.

It is proposed that an individual will now be deemed to have withdrawn from the fund on the day before he/she ceases to be a South African tax resident, while retaining his/her investment in the South African retirement fund.

The withdrawal tax payment (including associated interest), calculated in terms of the withdrawal lump sum table, will be deferred until payments are received from the retirement fund or as a result of retirement.

When the individual eventually receives payments from the fund and South Africa has the right to tax the payments, the tax will be calculated based on the prevailing tables. A tax credit arising from the deemed withdrawal tax calculated when the individual ceased to be a South African tax resident will be set off against any taxes due at the time funds are received from the fund.

One must also not forget that the January 2021 Taxation Laws Amendment Act locks in benefits from preservation and retirement annuity funds for a minimum period of three years with effect from 1 March 2021.

Where a South African is contemplating emigrating from South Africa and considering retaining his/her investment in a preservation or retirement fund until retirement, the individual needs to factor in the new tax treatment on their retirement fund. Tax will be calculated based on the withdrawal lump sum table on cessation of tax residency, on the full value of the interest in the fund, as opposed to the retirement lump sum table. When an individual is considering accessing the funds after the three year lock in period has lapsed, he/she will have to be mindful that he/she would have already suffered the punitive withdrawal tax, irrespective of whether they opt to wait for retirement or not.

For any South African who was planning to emigrate hoping to rely on a tax treaty exemption, this proposal is unwelcome news as he/she will now not escape tax in South Africa on their interest in a retirement fund.