In my previous article ‘Foreign employment income amendments’ (192
tsh 2019), I focused on the tax tests allowing one to achieve
nonresident status. The further issue arises of the ability of an
emigrant to access his or her retirement funds, and the tax treatment of
such access.
(The option exists to retain the retirement benefit value in a
retirement fund or alternately transfer it to a preservation fund, with
no current tax consequences, but it is assumed here that an emigrant
would prefer to access the monies, given a volatile rand.)
Emigration
after retirement from a fund in this circumstance, the fund member
would already be receiving regular annuity payments from a pension or
retirement annuity, which usually takes the form of a living annuity.
The
applicable rules are contained in the definition of ‘living annuity’ in
s 1(1) of the Income Tax Act, as read with the regulations. A living
annuity cannot be commuted (encashed), since the regulations permit only
an annual drawdown within the range of 2,5% to 17,5%.
On an
annual basis the annuitant can, amongst other things, elect to increase
this drawdown to the maximum 17,5% a year, thereby accelerating access
to the capital value over a five- to six-year period, to depletion.
The
annuity remains fully taxable in the RSA, notwithstanding the
emigrant’s tax residency, since its source is in the RSA, unless a tax
treaty provides otherwise, in which event the treaty prevails.
In
terms of the EXCON Manual for Authorized Dealers (paragraph B3) issued
by the SARB, permissible income-transfers abroad include annuity
payments originating from a retirement fund.
Emigration before retirement from a fund
In this
circumstance, as regards a pension or provident fund, emigration would
naturally result in a termination of employment, which would trigger
full commutation (encashment) by the fund member, being categorised as a
withdrawal for tax purposes.
The general rules for a retirement
annuity, pre-retirement, limit access until the attainment of the age of
55, unless there is earlier death or disability.
Nevertheless,
an exception exists for a resident who emigrates from the RSA when the
emigration is recognised by the SARB for purposes of exchange controls.
The lump-sum commutation would be treated as a withdrawal for tax purposes, and, as for a pension or provident fund benefit, be taxed at the ring-fenced rates, namely, R25 000 tax free, 18% on amounts between R25 001 and R660 000, 27% on R660 001 to R990 000, and a flat 36% on any balance.
Paragraph B2(J) of the SARB Manual permits an emigration allowance of R10 million for a single person and R20 million for family units, plus a travel allowance per person. (The travel allowance is part of the discretionary allowance of R1 million.) Thus the commuted amount from a retirement fund could be exported as part of the emigration allowance.