Emigration, delays, double tax and other worries

Emigration is now hot on everyone’s lips following a change to the process and the introduction of the three-year non-resident rule to access the lump sum withdrawal from retirement annuities and some preservation funds.

In terms of the change taxpayers will be subjected to a hindsight (three years) non-tax residency test from 1 March 2021 to access their funds. The concept of residence and non-residency from an exchange control perspective, the current test, will be abolished on 28 February 2021.

The only way to access the lump sum in the retirement annuity or preservation funds (where one withdrawal has been made) will be to wait until you have been tax non-resident for three or more years.

The three-year rule for tax emigration sticks

Aneria Bouwer, tax partner at law firm Bowmans, says people who are active members of pension or provident funds will not be impacted by this change.

“If they resign from their employment they can still receive the full amount, it will be taxed and they can invest it offshore.”

She shares the criticism on the three-year rule stating that people do not “simply flip-flop” between being resident and non-resident because of the massive tax implications.

Bouwer also shares concerns that the funds may depreciate in value while people have to wait to gain access to their funds. The main reason people are leaving the country is because they are concerned about the economic and political future of SA.

However, she considers the current panic to be completely “illogical”. People are concerned about government not wanting to give them access to their savings, and that has resulted in people thinking they have to emigrate immediately.

“It is tragic how people who would not otherwise have taken steps to formalise their emigration will now do it because they are concerned – rightly or wrongly – about their access to their retirement savings.”

She advises people to consider what retirement funds they have and whether they will be impacted. If they are still active members to an employer-related pension and provident fund they will not be impacted.

Another concern that has been raised it the potential of double taxation. Bouwer notes that when people eventually get the right to withdraw from the retirement annuity or preservation fund it will be considered a tax event in SA that will most probably give rise to a South African tax liability.

“The potential risk, if they have in the meantime become tax resident in a foreign country is that the foreign country could also impose tax on the amount.”

One would like to assume that it would not be taxed in the foreign country because the income relates to an asset which was acquired before the person became a resident in the foreign country, but individuals will have to consider this based on the rules of the foreign country, advises Bouwer.

Generally, she says, it should not be a problem because most countries will tax the person going forward and not necessarily on assets that they have accumulated before becoming tax resident in the foreign country.

However, Hugo van Zyl, vice chair of the personal and employment taxes work group at the South African Institute of Tax Professionals (SAIT), notes that this is not the case in Australia.

South Africans will pay double tax on the income from the retirement annuities or preservation funds they receive annually or monthly. However, if they were able to cash out, pay their South African tax on the amount they would not be taxed in Australia.

Van Zyl also notes the “bad timing” for people who are now in a hurry to emigrate. People who are submitting their emigration applications for approval by the South African Reserve Bank, may be faced with the provisional tax payment in February, as well as a potential capital gains exit tax. This may include capital gain on the deemed disposal of the home in Portugal that was acquired to obtain residency.

He has been warning clients that they may not get timeous access to the lump sum withdrawal from their retirement annuity or preservation fund to pay for the exit tax.

This is mainly due to the existing Covid-19 backlog and a new “panic filing” bottleneck as both the Reserve Bank and retirement funds dealing with the flood of withdrawal applications are not fully geared for the increase.

Another delay that is being anticipated, says Van Zyl, is obtaining tax emigration clearance. There is concern that the South African Revenue Service is equally unprepared to deal with the increased demand. There is already a backlog because of the impact of the Covid-19 restrictions, he adds.