Dear Sir / Madam,
Comment on Draft Taxation Laws Amendment Bill, 2025 – Removal of Foreign Retirement Fund Exemption (s10(1)(gC)(ii))
Introduction
We thank SARS and National Treasury for the opportunity to comment on the proposed repeal of section 10(1)(gC)(ii) of the Income Tax Act No 58 of 1962 “ITA”, dealing with lump sums and annuities from foreign retirement funds for past employment performed outside of South Africa.
Our firm advises a wide range of South African tax residents who have accumulated retirement funds abroad while living and working outside South Africa, often using after-tax income in those jurisdictions. Our submission focuses on practical consequences and equity considerations that, in our view, warrant more consideration.
Current Legislative Position
Currently, section 10(1)(gC)(ii) of the Income Tax Act provides an exemption for:
“lump sum, pension or annuity received by or accrued to any resident from a source outside the Republic as consideration for past employment outside the Republic other than from any pension fund, pension preservation fund, provident fund, provident preservation fund, or retirement annuity fund as defined in section 1 (1) or a company that is a resident and that is registered in terms of the Long-term Insurance Act as a person carrying on long-term insurance business excluding any amount transferred to that fund or that insurer from a source outside the Republic in respect of that member.”
SARS have proposed to remove the exemption all together on the basis of double non-taxation and the loss of exclusive taxing rights, where the foreign jurisdiction chooses to tax because of Section 10(1)(gC)(ii).
National Economic and Behavioural Impact
We believe that the proposed amendment could have a national economic impact greater than the extra taxes expected to be collected on this income. There is a view that the double non-taxation of foreign pensions is a loophole which is being exploited. However, it is our view, that repealing Section 10(1)(gC)(ii), will remove the very policy advantage that has made South Africa attractive to this group of retirees, who have chosen South Africa as the country to retire in. Many of these individuals have already bought homes and settled here, or would otherwise be considering doing so. If the exemption is removed, the full taxation in South Africa will act as a deterrent, resulting in fewer retirees choosing South Africa as a destination and reducing foreign currency inflows and domestic tax collections that arise indirectly through their spending.
It is also important to recognise that South Africa already faces other disadvantages as a retirement destination, including concerns around crime, the reliability of basic services, and uncertainty around future health care reforms. The existing pension exemption helps to offset these risks by making retirement in South Africa financially viable. Removing the exemption could therefore tip the balance against South Africa entirely, leading retirees to choose other countries and depriving the local economy of both foreign currency inflows and broader tax revenues.
We have received numerous requests from existing clients and even potential people who have not yet arrived but were considering coming to South Africa, reaching out to question these changes and the impact that they will have on them.
Retrospective Financial Shock – Based On A Real Life Example
This change represents a retrospective material financial shock, for people in their retirement age and for those already settled in South Africa and will force them to re-budget household spending and erode the value of their retirement fund and plans.
Consider a South African resident retiree receiving a foreign pension of £12,000 per annum (approximately R282,000 at current exchange rates). Under the proposed repeal, this entire pension becomes taxable in South Africa, resulting in an additional tax liability of around R87,000 per annum which represents 31% of the pension and results in a loss of 14% of the retiree’s gross taxable income. At retirement age, individuals no longer have the ability or time to re-engineer their careers or savings strategies to compensate. This may make living in South Africa unsustainable.
In the above example, the taxpayer is pushed into a higher tax bracket, from a 26% marginal rate to a 36% rate, which causes the other income to be taxed a much higher levels.
It will cause additional administration burdens for those who now have to become registered as provisional tax payers but were not required to do so previously.
Taxing Original Capital/Return of Own Contribution
The proposed change does not distinguish between a taxpayer’s own contributed capital and the investment returns. Treating the full withdrawal amount as taxable income does not align with normal tax principles of only taxing the return. The subsequent return of that very capital is not ‘income’ but merely the return of one’s own funds. This practice penalises individuals who acted prudently and responsibly in providing for their retirement.
Original Contributions In The Foreign Country May Not Have Been Tax Deductible
Further to the above, contributions to the foreign retirement fund may not have been tax deductible in the country of origin and no deduction would have been granted from SA taxable income, and thus represented deductions from after-taxed income.
This not only represents a double taxation of these funds if the full life cycle of the money is taken into account but also makes it unfair and inequitable for these taxpayers as opposed to taxpayers who remained in South African and made tax deductible contributions. This undermines the basic principle of fairness and equity in taxation.
Triggering Residency – Fair Value of assets
Many of the impacted tax residents have come to South Africa during retirement age, meaning that significant value existed in their retirement funds which occurred before triggering SA tax residency.
Normal tax principles for assets under the Eighth schedule, paragraph 12(2)(a) allow a step up to market value at the time of triggering residency. Retirement fund assets are not included within assets under the Eighth schedule.
The proposed change to the retirement funding would result in South Africa taxing not only the original capital contributions but investment growth which arose before the person became a tax resident while they were outside of South Africa and would treat these assets differently from the tax principle which applies to most other assets.
At a minimum, post-residency growth should be separated from pre-residency growth, with only the former considered for South African tax. This would most likely involve complex reporting challenges to obtain these figures.
Ceasing Tax Residency
When an individual ceases South African tax residency, Section 9H of the ITA deems a disposal of worldwide assets at market value, thereby taxing South Africa on growth up to the date of exit, but not thereafter. Currently retirement funds are excluded from this. Has there been any consideration to the tax implications on these tax residents, when they cease their tax residency.
The new changes may cause people to make this change early and thus cause a flight of capital out of the country.
Addressing SARS Reasons For Removing The Exemption – Double Non-Taxation
We have already addressed this point above, where the change may in fact result in a double taxation, rather than a double non-taxation if the full life cycle of the money is taken into account. The taxation of the funds in the country of origin needs to be considered.
SARS Second Reason For Doing This – SA Forfeits Its Right To Tax By Maintaining The Exemption
We understand that certain tax jurisdictions, may choose to tax the retirement benefits because South Africa has essentially given up its exclusive rights to tax by maintaining Section 10(1)(gC)(ii).
We do not believe that the appropriate response is to blanketly remove the section but rather to address this by giving SA the right to tax in these instances. An amendment can be made to the section, which addresses this.
It must also be borne in mind that the tax acts are overridden by the various double tax agreements and therefore any change will be limited in this respect. For example, the Netherlands DTA grant the state in which the contributions were deducted for tax purposes to have taxing rights.
The Australian DTA is possibly the one to which SARS are referring as it contains wording which exempts the pension for tax in Australia to the extent that the pension and annuity is included in taxable income in the other State i.e. South Africa in this case. However, based on my discussions with various clients, the Australian tax act, has a similar provision to our Section 10(1)(gC)(ii) which exempts the pension from taxation. One recent discussion with a prospective tax resident, would incur R360,000 annual tax and is now considering other retirement destinations. South Africa in this case, would lose the overall capital inflow if this person decides to relocate and/or not settle in South Africa.
The United Kingdom does not levy income tax on certain retirement funds paid to individuals who are non-resident in the UK. This feature has, for many years, encouraged retirees with UK pension entitlements to relocate to South Africa, where the exemption in section 10(1)(gC)(ii) has allowed them to enjoy a secure retirement while contributing meaningfully to the South African economy. Our concern is that the repeal of this section will stop this inflow of retirees in the hope of obtaining extra tax in other jurisdictions, where the DTA will limit or prevent this in any event. Thus the overall effect will be to lose the overall retirement funds from UK retirees.
Recommendations
Whilst we would prefer not to see any changes to this section, except perhaps to address the loss of exclusive taxation rights, we recommend the following points be considered:
- Excluding original capital contributions;
- Valuation of the fund on triggering residency;
- Apply changes prospectively and not retrospectively;
- Proper analysis taking into account the impact of reduced retirees and loss of existing taxpayers, which would also include their other taxable income, not just the retirement funding. Conclusion
Conclusion
We support efforts to protect the tax base and address tax avoidance, however this proposed legislative change targets the vulnerable and often the most compliant members of South Africa and a blanket repeal of section 10(1)(gC)(ii) risks a negative blow back, causing an exit from the South African tax base. It will most likely turn off the spigot of foreign inflows which South Africa currently enjoys.
The proposal also represents a structural shift with serious real-financial impact for some. Many affected individuals are retired persons who have already moved to South Africa, bought homes, and planned their finances around the exemption. Imposing full taxation now is a retrospective tax which undermines trust in the predictability of the tax system and discourages further retirement inflows.
We urge SARS and National Treasury to adopt a targeted approach that prevents abuse while preserving fairness, capital-recovery principles, and South Africa’s attractiveness as a retirement destination.
Kind regards
Jeneen C Galbraith (CA(SA))
