Government wants to remove current tax exemption on pension payouts.
Retired South Africans who contributed to a foreign retirement product while working abroad in the past are facing a higher tax burden – and potentially even double taxation – from next year.
National Treasury is proposing to scrap the blanket tax exemption in the Income Tax Act on foreign retirement benefits received by South African tax residents for past employment abroad. The proposed amendment date is 1 March 2026.
Affected parties have until 12 September to comment on the proposed changes in the draft Taxation Laws Amendment Bill that was published on 16 August.
Treasury has two issues with the current blanket exemption. It may result in double non-taxation, where the foreign country does not tax the retirement income due to its domestic law or tax treaty limitations. SA also foregoes the revenue due to the exemption.
The second issue is that SA foregoes revenue because despite having the exclusive right to tax under a double tax agreement (DTA), it maintains the exemption. The foreign country may then choose to tax the retirement benefit since SA does not.
If the amendment is passed, it may now result in double taxation, explains Jenny Klein, principal tax associate at ENSafrica.
If a SA tax resident finds themselves in this position, they may claim a tax credit on the foreign taxes paid. This should be “straightforward”, provided that the taxpayer can provide proof of the foreign tax paid on the pension benefit to the South African Revenue Service.
Such proof can take the form of an earnings certificate issued by the retirement fund, reflecting both the pension and the taxes paid on the pension or, preferably, a copy of an assessment issued by the foreign tax authority showing that the pension has been subjected to tax, says Klein.
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High burden
She gives the example of a pensioner receiving a foreign pension of £5 000 per month (approximately R118 000 per month), which is currently not subject to tax in South Africa.
From March next year, if they have no other South African taxable income, their tax liability will be R37 783 per month, assuming they are between 65 and 75. This would effectively reduce their net income by 32%. Based on this example, they would be required to make a provisional tax payment of R226 698 in August and in February to settle their income tax liability.
“If the pensioner has other taxable income in South Africa, the fact that their foreign pension would now become taxable in South Africa may result in them moving into a higher marginal tax bracket,” says Klein.
The proposed change only applies to taxpayers who are tax resident in SA. Anyone who does not meet that description, and it may require careful consideration as to whether someone is a tax resident or not, will not be affected by the proposed changes.
Klein notes that the proposed changes cannot override any provisions in an applicable DTA between SA and a foreign country. It will therefore be important to consider the DTA between SA and the foreign jurisdiction to determine the South African tax treatment of the foreign pension benefit.
No change is proposed to the tax exemption for payments to a South African resident from the social security system (government pension funds) of another country.
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Double whammy
Joon Chong, tax partner at Webber Wentzel, says the contributions by a SA resident to a foreign pension fund while working abroad were made from an income that was taxed in the foreign country.
Their income stream on retirement in SA will now also become taxable without them having had the benefit of a deduction when they made the contributions. She explains that foreign pension funds are not “approved pension funds” for SA tax purposes.
“This creates a situation of effective double taxation over the lifecycle of the investment in the foreign pension fund. The capital base of the pension [the contributions] was built from after-tax funds, and now the income stream [the annuity or pension payout] derived from that same capital base will be taxed again in South Africa,” says Chong.
“This places individuals with international work experience and savings at a distinct – and arguably unfair – disadvantage compared to those who have saved exclusively within the South African system,” adds Chong.
Klein says it is possible that, because of this change, some individuals may move their tax residence to another country.
Chong agrees and says if the amendment is passed and SA residents are receiving foreign pension benefits, this rule will be unavoidable.
“It may encourage emigration.” However, the cost of living and the cultural and family connections will play an important role in the decision, she adds.
This article was republished from Moneyweb. Read the original here.
