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Typical Double Tax Treaty Misconceptions

http://www.cashkows.com/icecream/2012_december/hugo.asp

Typical issues we deal with on tax emigration:

United Kingdom / South Africa DTA

  1. Tax residency change not timeously reported to either SARS or HMRC

    Most client suggest that they need file or report their SA income to the UK tax authority as they were non-domiciled in the UK and as the lump sum was not remitted to the UK, they need to pay UK tax on the lump sum income. No, says HMRC although you are non-domiciled you are subject to UK tax on lump sums received in SA, albeit not remitted to the UK, as lump sums are taxed on the arising basis and not on the remittance basis. In short, you cannot defer UK tax on the lump sum arising in SA, by sending said lump sum to Channel Islands, USA or EU nor can you escape the UK tax exposure by keeping the lump sum in your blocked account in South Africa.

  2. The treaty dictates that lump sum received from South African fund managers on retirement annuity fund (RA) lump sums or pension/preservation funds, are tax exempt in SA and UK taxed only

    This argument is most often presented to us by clients having called the HMRC call centre. We do not know how the client explained the situation to the HMRC call centre but suffice to say the answer is incorrect. The fact that HMRC refers you to Article 17 of the treaty is not adequate as the said article does not deal with lump sums. Article 17 specifically states that for purposes of the agreement an annuity taxable in the new home country only, is a fixed amount paid on a regular basis. You need not be tax lawyer to understand why the lump sum will never fall into this category of treaty exempt (in SA) annuity payments.

  3. All monthly annuity or pension received from either a living annuity or a pension fund, established in South Africa and contributed to whilst tax resident in South Africa is automatically tax exempt in SA

    I wish the answer was so easy. Yes, the fixed monthly annuity paid from or by a SA fund, is in most cases tax exempt but in several other cases it not tax exempt. Although the treaty may exempt you from SA tax, there is no obligation on the SA fund manager to cease with the PAYE (pay as you earn payroll withholding tax in SA) as they are not able to determine or verify your tax residency status. It is for SARS (in conjunction with HMRC in certain cases) to confirm your tax status as non-resident which will then allow for the PAYE deduction to be determined. The exemption process, which then also includes the refund process should you claim the tax exemption on tax filing only, includes obtaining a TRC (tax residency certificate) in the UK issued by HMRC, the completion of SARS form IT24 to be filed initially with and another original copy duly date stamped by HMRC, being filed with SARS in South Africa. Now only will SARS issue the PAYE exemption letter (as there is currently no provision for said exemption within the tax directive process found online and used by fund managers i.e. lump sum and fixed percentage tax deductions applicable to their own commission agents). Clients often prefer to claim a refund on assessment only in which case the client needs to send same TRC and proof of foreign residence to SARS, file the annual IT12 tax return and claim the necessary exemption and tax refund in SA.

Australia / South Africa DTA

  1. Australia is my habitual home and therefore I am Australian Tax Resident and not subject to SA taxation – close down my SARS tax numbers

    Sadly it is not that easy. First of all, gross income in SA tax law refers to income of a tax non-resident sourced from or deemed to be sourced in SA. Being gross income, you have to file and claim the tax exemption or tax deduction as tax filing obligation is based on gross income level and not taxable income level. It is also important to note that not all South Africans living in Australia is exclusively tax resident in Australia as they fail to understand there being two types of tax residents in Australia. Without being too technical, the first group (all on PR) is tax resident in Australia reporting worldwide income to the ATP. The second group is tax resident reporting only Australian sourced income to the ATO, where a salary earned in Australia yet paid from a SA company in respect of a contract of employment in SA, is deemed to be Australian sourced as you are performing your duties in Australia. The latter group are typically work permit or 4 year 457 visa workers. They need not report their SA CGT events and interest to Australia but equally their SA interest is NOT tax exempt in SA. The reason being the tax treaty with Australia excludes from Australian tax resident definition any person paying tax to Australia on Australian sourced income only. Yes, 457 expats are normally exclusively tax resident in SA for as long as they are waiting for the PR (permanent residence permit) to be issued. This said, you will then be obliged to declare your Australian sourced income to SARS, yet you may claim a tax credit i.r.o. ATO taxes paid and in certain cases you may even qualify for the 183/60 day exemption. Finally, the last hurdle that triggers the habitual tax resident is that the Australian treaty with SA, does NOT refer to habitual tax residents. Yes, it may be in the all the other RSA treaties, the decisive treaty tie breaker but is does not apply to South Africans living in Australia. No need nor any benefit in counting days to show you habitually tax resident in Australia. As long as you have a 457 you are exclusively tax resident in SA and once you obtain a PR in Australia but kept you holiday home, your farm or your caravan in SA, you are at risk of being treated tax resident in SA. For taxpayers with a permanent abode or home available to them in both countries or in neither, will be deemed to be tax resident in the country where there centre of vital interest is. Well that is a topic of a doctorate but suffice to say, until you formally emigrated or removed all but all you assets and most of your family from SA, your centre of vital interest is probably SA and you will remain exclusively tax resident in South Africa. Confused? We understand, feel free to contact writer for a more detailed analysis of your personal circumstances as generalisation is the biggest mistake a tax adviser can make. The above rules are thus a high level overview without the intention to generalise, yet you best advised to approach an experience and reputable tax adviser in either SA or Australia.

  2. All monthly pensions and or annuities from retirement funds are tax exempt in SA and taxable in Australia only

    This is not true as pension from government and living annuities bought from funds not earmarked as retirement funds, are normally taxable in SA, with or without ATO having the right to tax again.

  3. South African companies should not withhold dividend tax on my dividends and no PAYE on my RA lump sum as I am tax non-resident in SA and tax resident in Australia

    The treaty or DTA covers this in detail and although tax rates may be capped, the treaty specifically allows SA to tax at source despite you being tax non-resident. The ATO will duly credit you with the SARS taxes paid.

  4. I do not need to report my SA discretionary trust to the ATO (their SARS) as I have not received any benefit from the SA trust. It holds not assets in Australia.

    Wrong. Under the ATO’s transferor trust measures, residents of Australia (immigrants included) who have transferred property (including money) or services to a non-resident trust, will be taxed in Australia on the accrual of certain profits derived by the foreign trust. The reference to transfer of property or services to a trust includes the transfer of property or services by way of creation of a trust or funding of a trust in say South Africa. Section 99B (Australia) can also assess amounts paid to, or applied to the benefit of, a resident beneficiary of a foreign trust estate; for example, it can apply to distributions out of accumulated foreign income or gains of the trust. In short the ATO ignores the SA concept of discretionary trusts and will always tax the funder unless the beneficiaries were taxed on some of the trust income. Do note the section 96A FIF fund rules were abolished and beneficiaries are not always taxed on their growing expectation pot of gold. There is no provision to limit the above to Australian trusts or assets held in Australia. It covers worldwide trust, created before and after tax immigration to Australia.

SA Pension due to non-resident: An interesting ruling, which may be technically correct but in many ways inadequate

On October 3rd, 2013 the South African Revenue Services (www.sars.gov.za) issued BPR 156 (binding private ruling) which ensure some clarity on the taxation of many expats’ pension funds stuck in South Africa.

An interesting ruling, which may be technically correct but in many ways inadequate, writer felt one first read. Perhaps incorrectly? Let’s consider the outcome and value of the ruling.

Like most SARS rulings, it brings clarity but adds several “however” warnings. Before we address them, allow me to summarise the ruling, with an extract:

SECTION: SECTION 1(1), DEFINITION OF “GROSS INCOME” PARAGRAPHS (a) AND (e)

SUBJECT: PENSION BENEFITS ACCRUING TO A NON-RESIDENT FROM A RESIDENT PENSION FUND

1. Summary

This ruling deals with the question whether and to what extent a pension annuity and a retirement fund lump sum benefit, received by or accrued to a person who is not tax  South Africa from a pension fund registered in South Africa, will be taxable in South Africa.

2. Relevant tax laws

This is a binding private ruling issued in accordance with section 78(1) and published in accordance with section 87(2) of the Tax Administration Act No. 28 of 2011.

In this ruling all references to sections are to sections of the Act applicable as at 13 August 2010 and unless the context indicates otherwise, any word or expression in this ruling bears the meaning ascribed to it in the Act.

This is a ruling on the interpretation and application of the provisions of section 1(1), definition of “gross income” paragraphs (a) and (e).

3. Parties to the proposed transaction

The Applicant: An individual who is not a “resident” as defined in section 1(1)

The Pension Fund: A pension fund registered in South Africa and approved in terms of the Act

4. Description of the proposed transaction

The Applicant was employed by a company which is a resident of South Africa and forms part of a group of companies. In 1999 his employment with the company was terminated. He left South Africa to join another company, within the same group of companies, situated outside South Africa and became ordinarily resident in that other country. He subsequently moved to two further countries. While working in South Africa he contributed to the Pension Fund, and continued to contribute, although he stopped being a resident of South Africa.

5. Conditions and assumptions

This ruling is subject to the following additional condition and assumption:

The Applicant is not a resident of South Africa on the date that the pension annuity and retirement fund lump sum benefit from the pension fund accrues.

6. Ruling

The ruling made in connection with the proposed transaction is as follows:

The portion of the pension annuity and retirement fund lump sum benefit received or accrued from a South African source, that is, which relates to services rendered in South Africa, will be included in the Applicant’s gross income in South Africa.

7. Period for which this letter is valid

This binding private ruling is valid for a period of 5 years from 13 August 2010.

Issued by:

Legal and Policy Division: Advance Tax Rulings

SOUTH AFRICAN REVENUE SERVICE

Having read the above and before we drown in the bubbly, the however issues remain:

  1. See the reference to August 2010. The law changed in 2011, leaving the current position as uncertain.

Prior to December 2011, the South African Income Tax Act (SAITA) applied source rules to apportion pension or retirement fund benefits following on from employment.

The above BPR is incomplete in that it completely fails to refer to the then section 9(1) (g) (ii) which determined that a portion of a pension granted to an individual would be deemed to be from a source within South Africa.

Being non-resident (which is a pre-requisite of this ruling) you are taxed on SA sourced income only and income not from a deemed or actual SA source, will not fall into gross income and can thus not be taxed by SARS.

The current (February 2014 tax rules) apportionment rules applicable from 1 January 2012 changed the source rules applicable to retirement fund payments significantly. One  must be careful in assuming that the above ruling is still applicable. The reference to 5 years from 2010 is therefore rather confusing and perhaps a little misleading. It should have stated, in respect of lump sums and pension annuities before 1 January 2012 (which is February 2012 tax year in SA).

Due to the new rules in SAITA section 9(2) (i), the apportionment of these benefits changed and one would think that the 2012 and thereafter monthly pension (of someone having retired in August 2010) will be taxed in terms of the new rules. The BPR is silent on this topic, leading one to believe the reference to validity of 5 years is confusing and creates uncertainty.

What then is the current rules? The pension which is received for services which were rendered partly outside South Africa, will be apportioned. The proportional pension to be included in taxable income must be calculated in proportion to the time spent rendering services in South Africa. For example if 10 out of 30 years’ of services were rendered in South Africa, one third of the pension will be taxable in SA.

In terms of SAITA section 10(1)(gC) the  portion of the pension which is sourced outside South Africa and is received as consideration for past employment outside South Africa will be exempt from South African tax.

Previously (in 2010) if said person did not work in SA in the last 10 years prior to retirement and was non-resident, there was often no deemed SA source income. Equally, residents could claim tax exemption for the years outside SA should they have worked outside SA for at least 2 of the last 10 years of employment.

The big difference is thus that anyone having worked in SA, contributed to a pension fund and now receive either a lump sum or pension annuity from a retirement fund (which includes a living annuity funded from a pension preservation fund) could be subject to SA taxation based on years in SA vs. years contributed.

Could be, not will be, as the double tax treaties overrule this section and the Australian tax treaty allows only Australia to tax private pension funds paid to expats South Africans now tax resident in Australia.

  1. The second however is the incorrect tax assessments issued since before September 2010? SARS follows a 3 year prescription period often denying late objections where the assessment was issued 3 or more years ago. The ruling was issued early October 2013, giving SARS the right to deny objections for assessments issued before October 2010? Many expat  individuals will then have to accept their February 2010 assessment was issued incorrectly and only February 2011 and thereafter tax years can be re-opened provided you one can convince SARS of the merits. Not having claimed the exemption could jeopardize your chances somewhat.
  1. The third and last however is the procedural changes was not addressed. The tax directive sent in by the retirement fund may thus include only the deemed gross income, on the SA employment years. Where the employee is receiving the lump sum from the employer managed pension fund, it will be for the employer to confirm the years in or outside SA. For retirement funds not employer managed (i.e. Preservation Funds, living annuity fund managers and umbrella funds) there may be a risk in that they are not certain of the years in or outside SA. The further condition is that on receipt of the funds, the taxpayer must be tax non-resident. This is not a topic to be adjudicated by fund managers it is a process determined, in terms of tax treaties, by competent authorities.

If one assume the same SARS team having issued an emigration tax guide under the heading “EXTERNAL GUIDE – Venture Capital Companies” many future disputes can be foreseen.

An interesting ruling, which may be technically correct but in many ways inadequate!

When will SARS issue the ruling or a guideline on the current tax law, effective as of 1 January 2012 remains to be a question.

2009 Tax law Amendments – published for comment

Hermanus 3 October 2013

Issued to stimulate debate, not to give tax advice. Subject to normal disclaimers of this forum and writer’s normal terms and conditions of engagement.

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