SA RETIREMENT LUMP SUMS: FULLY TAXABLE DESPITE OFFSHORE SERVICES

Promulgation of the 2016 Taxation Laws Amendment Bill on 8 January 2017 brings about an impending change to the way in which South African pension, pension preservation fund, provident funds, provident preservation funds and retirement annuity fund (“hereinafter collectively referred to as a “retirement fund”) lump sums are taxed in South Africa for South African tax residents. The brunt of impending the change will be borne by South African tax residents who render employment services outside South Africa while still saving for retirement in a South African retirement fund.

Currently, the Income Tax Act, No. 58 of 1962 (“the Act”) allows an exemption for South African tax residents from tax on lump sum payments from a South African retirement fund to the extent that the services giving rise to the payment were rendered outside South Africa. With effect from 1 March 2017, this will no longer be the case.

According to the explanatory memorandum issued by SARS addressing, amongst others, the reason for changing the status quo is to avoid the disparity which ostensibly arises where South African residents get the benefit of an income tax deduction for contributions towards the retirement fund whilst enjoying an exemption (or partial exemption) on pay-out.

Accordingly, with effect from 1 March 2017, lump sums received by South African tax residents from South African retirement funds will be fully taxable, irrespective of the location where services giving rise to the benefit were rendered. Benefits paid from retirement assets transferred from a foreign fund to a South African retirement fund will however remain exempt from tax as per the status quo.

It is important to note that the change referred to here only effects South African tax residents. Non-residents will still be required to identify the source of the lump sum in accordance with the provisions of section 9 of the Act to assess any South African tax liability.