Foreign
exemption
of pensions
photograph: SUPPLIED
The new tax legislation and its implications
I By Madeleine Schubert, Citadel strategic director: Tax and Fiduciary
Until recently, both resident and non-resident taxpayers were able to obtain taxfriendly treatment on their pension and
lump sum benefits accruing from pension
funds located in South Africa. Unfortunately, things have become a little more complex, so I will endeavour to explain the new
tax legislation and its implications below:
In terms of the South African Income
Tax Act, non-residents are only liable for
tax on South African source income,
whereas resident taxpayers are liable for
income tax on their worldwide income.
This previously meant that for a resident,
all income, whether local or foreign,
would be included in gross income. Relief
was then sought, however, in terms of an
exemption for income from pension
funds located outside of the country.
Section 10(1)(gC) of the income tax act
provides such an exemption to South African residents on the basis that it exempts pensions received by residents
from a source outside South Africa.
Historically, this has been quite confusing.
The source of services was therefore clarified
by section 9(1)(g), which deemed pensions
to be from a South African source if the services in respect of which such payment is
made were performed in South Africa for at
least two years during the last 10 years, immediately preceding the date from which the
pension/annuity became due. This meant
that pensions that accrued to a person not
falling foul of the 2/10 year rule were exempt
in full from income tax. This was, however,
still very confusing, so the rule was deleted
and replaced by a section 9(1)(i), which now
clarifies source for purposes of pensions.
In short, lump sums and annuities are
sponsored feature
deemed to be from a South African source
if the services in respect of which these
accrued were rendered in SA. If, however,
the services were partly rendered in SA
and partly not, only the portion that relates to the South African portion over
total service years will be deemed to be
from a South African source.
Section 10(1)(gC) will exempt the portion that relates to the income attributable to services rendered outside SA for
residents, while non-residents will be
taxed on the portion that is regarded to
be from a South African source.
An important note to make is that the
location of the fund is irrelevant when the
source of a pension is to be determined. If,
however, the fund is located in South Africa, the abovementioned taxation rules
with regards to non-residents are reasonably easy to enforce. In the case where a
non-resident has worked historically in SA
and contributed to a non-resident fund,
however, a tax liability will nevertheless
arise for such a non-resident on source,
but the enforceability of such taxation becomes impossible as neither the non-resident nor the fund is located in SA. Hopefully, such a non-resident will pay tax in
his/her resident tax country.
On 3 November 2013, the South African
Revenue Services (SARS) issued a Private
Binding Ruling 156, which confirmed that
from now on, non-residents will be liable
for South African income on pensions received if these arose fro