Workshop: National Treasury and SARS Workshop on Foreign Pensions
Attendee: Jeneen Galbraith
Proposed Removal of Foreign Pension Exemption
The workshop centred on the proposed repeal of the foreign pension exemption in section 10(1)(gC)(ii) of the Income Tax Act. This exemption currently allows South African residents to receive certain foreign pensions tax-free.
What Was Discussed
Economic & behavioral impact: Loss of policy advantage which is currently attracting retirees to the country, who come by choice. A number of retirees, some prospective spoke at the workshop and indicated that this repeal would definitely impact their decision to remain or come to South Africa. One noted that there is a much broader consideration even extending to foreign visitors who come into South Africa to visit family here – an indirect economic benefit that could be lost.
Double taxation vs. double non-taxation: Experts explained how countries differ in how pensions are taxed (contributions, growth in the fund, withdrawals). In some cases, repealing the exemption could actually create double taxation rather than double non-taxation when looking over the full life cycle of the money.
International context: DTAs (double tax agreements) vary widely but super-cede the tax act. However, the UK is seen as the most impacted, while the US retains taxing rights over its citizens, so American retirees may not be directly affected unless they give up their US citizenship.
Practical challenges: Retirees highlighted the near-impossible task of tracing decades-old pension contributions to determine whether they were made from pre- or post-tax income.
Ideas Discussed
Some of the ideas discussed were:
1. “Grandfathering’ for existing retirees i.e. protecting current recipients, and only applying changes prospectively. This of course will not assist retirees already in the country but who have not yet drawn down on their pensions.
2. A partial exemption or a flat tax rate.
3. Only taxing money brought into the country i.e. on a remittance basis approach
Socio Economic Impact Study
It was suggested that Treasury conduct a socio-economic impact study before any decision is finalised.
Mood of the Workshop
While there was strong pushback from participants, the closing remarks suggested that government still views this as an area of ‘double non-taxation’ and is determined to press ahead. It was noted that when the exemption was first introduced SARS indicated it would be reviewed in the future – and this appears to be the moment.
Likely Direction
Our sense is that Treasury may move toward a compromise model similar to section 10(1)(0), which introduced a R1.25m tax-free exemption threshold and taxation only above that level. This would protect retirees with modest pensions but still capture tax on larger foreign pensions. The unintended consequence, however, may be that wealthier individuals — who contribute significantly to the economy — may look to leave South Africa. There was no discussion at all about what the level of exemption would or could be.
Key Takeaway
Treasury may lean toward a compromise model, similar to section 10(1)(o), with a capped annual tax-free threshold (e.g. R1.25m).
- This would protect modest pensions but still capture tax on larger ones.
- Risk: wealthier retirees, who contribute significantly to the economy, may leave South Africa.
- No indication yet of what threshold (if any) might be set.
This remains a live issue with significant implications for retirees and for South Africa’s attractiveness as a retirement destination.
Clients who may be affected should start:
- Assessing potential exposure, and
- Considering available planning options.
We will continue to provide updates as the legislative process unfolds.
