South Africans wanting to emigrate will need to carefully consider the latest proposal around the taxing of retirement funds and how it may impact them.
Several far-reaching changes to the emigration process have been introduced in recent years and retirement savings have now been added to the pot.
Gavin Duffy, partner at PwC, says the timing of the latest proposal is quite unfortunate and just adds to the panic of South Africans who have already left, or are considering a move, whether it is medium term or permanently.
In the latest proposal, published in the July Draft Taxation Laws Amendment Bill, National Treasury seeks to secure taxing rights for South Africa on payments from retirement funds in all instances.
The “problem” it wants to address are instances where the country in which the South African is tax resident has the sole taxing right on payments from retirement funds in terms of a double tax agreement.
In order to secure taxing rights for South Africa, Treasury proposed that the day before the individual ceases South African tax residency, the taxpayer will be “deemed to have withdrawn” from all South African retirement funds.
The deemed withdrawal proposal will be effective from March next year.
But from March 1 this year South Africans must be tax non-resident for three continuous years before the retirement annuity fund and preservation fund (where the one election for withdrawal has been taken) may allow withdrawals. This means a tax is triggered on a deemed withdrawal, and interest will be levied during the three-year wait.
Duffy expressed concerns about the potential of double taxation. He explains that the Organisation for Economic Cooperation and Development provides in the Model Tax Convention that payments from retirement funds are taxable only in the country where the individual is tax resident. South Africa has negotiated with these countries for them to have sole taxing rights.
Countries that have sole taxing rights in their Double Tax Agreements with South Africa include the UK, Australia, New Zealand, China, Hong Kong, Denmark, Germany, Italy, Portugal and Spain.
In terms of the proposed new change the retirement savings and interest on the deferred tax debt will now also be subject to tax in South Africa.
Duffy says the draft proposal has not set out how Treasury will deal with double taxation. The purpose of double tax agreements is to avoid double taxation.
“With double tax treaties two countries sit down and negotiate in good faith how various scenarios may be dealt with. South Africa is now saying they do not like the provision in the treaty that they have negotiated. It now wants to introduce an additional piece of legislation that raises a huge number of issues.”
Duffy advises people who plan to leave SA to consider carefully where they are going and what the provisions under the double tax agreements are. This will enable them to make meaningful decisions about what to do with their retirement savings.
Dawie Klopper, investment economist at PSG, says PSG continuec to encourage people to save as much in retirement products as possible in order to make full use of the tax benefits. However, the signs and messages from government around retirement savings may discourage people from saving in these products, and that will be detrimental for taxpayers and government, he says.
People who consider redirecting their savings should understand the tax consequences. A maximum of 27.5% of remuneration or taxable income (whichever is higher), and no more than R350 000, is tax deductible in a tax year.
“There is the risk that the tax on income from discretionary investments may be more than what you may be paying when you are in a retirement savings product.
“The returns will have to be extraordinary to compensate for the tax benefit you will be forgoing,” says Klopper.
He adds that people who do consider increasing their discretionary savings (instead of retirement savings) should be mindful of the self-discipline required not to access these savings for day-to-day expenses or luxury items.
“Young people have to ask themselves how the world will be in 15 years’ time. If they do save only in discretionary investments, they still have to save regularly and they have to save more to make up for the loss of the tax benefit.”
Klopper says government’s approach to retirement savings will dictate how South Africans think about their investments. “If they do not have the assurance from government that they support a market orientated economy, they should not be naïve.”
Duffy is also concerned that people will make rash life-changing decisions out of fear of proposed legislation that is still a real unknown.
Rethinking the proposal
Duffy is of the view that the tax authority and Treasury may have to take a second think on their proposal.
“I am not convinced that it has been thought out extensively in terms of the impact on the various double tax agreements and the vast amount of scenarios that arise under this.”
He says Treasury assumes that a taxpayer will know when they cease to be tax resident, and they also assume that a fund administrator will know.
“It seems as if Treasury assumes that every case of cessation of tax residency is someone permanently leaving SA, but that is simply not the case.”
Someone may be going on multiple assignments and end up ceasing tax residency two or three times during their life. That means they have a deemed withdrawal when they cease tax residency, resume tax residency and cease again.
This scenario has clearly not been addressed.
Duffy also says that even if the proposal could be done conceptually, it may become an administrative nightmare for taxpayers or the fund administrators to track the deemed withdrawal and tax calculation and the recalculation years later.