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National Treasury has recently published the Taxation Laws Amendment Bill, which incorporates taxation proposals tabled in the 2021 National Budget.  Several rules pertaining to the income tax treatment of retirement savings upon tax emigration have been included in the Bill.  These proposed amendments impact the exit tax value, resulting in taxation consequences for South African taxpayers planning emigration. 
income tax
Background
  • Historically, retirement savings could be withdrawn upon emigration, provided the “financial emigration” through the South African Reserve Bank (SARB) was completed.
  • The withdrawal was taxable, at prevailing withdrawal tax rates.
  • Tax emigration is proven once SARS is satisfied that South Africa is no longer the true home of the taxpayer.
  • Upon tax emigration, the taxpayer is deemed to have disposed of their worldwide assets at market value (excluding immovable property located in South Africa).
  • This deemed disposal is subject to capital gains tax on the value by which the market value of each asset is greater than its base cost. This difference is called the “exit tax”. 
  • Historically, a taxpayer’s interest in their retirement products was not subjected to exit tax. Retirement products include pension and provident funds, pension and provident preservation funds and retirement annuities.
Proposal

Since 1 March 2021, the “financial emigration” process through SARB has fallen away.  Retirement funds are now prevented from permitting withdrawals against those funds until the emigrated taxpayer has been a non-tax resident for an uninterrupted period of not less than three years. 

  • Under the proposed amendments, and in addition to the financial emigration development earlier this year, the value of the taxpayer’s interest in the retirement product is taxable.
  • The value thereof will be determined on the day immediately prior to the tax emigration date.
  • It will be taxed with reference to the taxation table for withdrawals from retirement funds.
  • The liability to pay the taxation is deferred to when the taxpayer is able to access the funds i.e. after the 3-year period or upon actual retirement, whichever occurs sooner.
  • The amendments proposed include interest to be determined on the taxation calculated, from the date upon which the taxation liability arises (the day prior to tax emigration) until the date that the tax is paid.
  • The rate of interest is the current prescribed interest rate of 7%.
What is evident from these proposals is growing complexity and cost in the tax emigration process for South Africans wishing to leave the country.  Our tax consultants are well versed in the application of tax emigration principles and can be reached here for assistance in interpreting these provisions or with other income tax matters.