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
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.
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.
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:
- 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.
- 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.
- 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.
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.