Up until 28 February 2017, the tax legislation in respect of retirement benefits stipulated that a South African resident who is employed outside of the Republic is permitted to receive tax free, the proceeds of the retirement benefits which accrued in a South African retirement plan, when they were working overseas. Simply put, if an employee was seconded overseas but remained on the South Africa retirement fund, the portion of the fund credit on withdrawal which is attributable to the period when he was employed overseas, would be tax free.
The applicable legislation was contained in section (9)(1)(g) and 10(1)(Gc) of the Income Tax Act. The latter section caused heated debate and some confusion regarding the tax status, however, this was clarified in late 2014 when SARS issued a Binding General Ruling No. 25. This ruling stipulated that the portion of a pension which has accrued to an employee and which relates to services rendered outside of the Republic, will not be subject to tax.
CHANGES TO THE LEGISLATION
From 1 March 2017, this exemption will no longer apply. Only the proceeds from a foreign retirement fund will qualify as tax free. This has a significant impact given that the policy of many South African companies is to keep their outbound expats on the South African retirement fund.
The legislation which has changed this is The Taxation Laws Amendment Act, 15 of 2016 which was published in the Government Gazette on 19 January 2017 and states:
(b) by the substitution in subsection (1)(Gc) for subparagraph (ii) of the following subparagraph:
(ii) lump sum, pension or annuity received by or accrued to any resident from a source outside the Republic as consideration for past employment outside the Republic other than from any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund as defined in section 1(1) excluding any amount transferred to that fund from a source outside the Republic in respect of that member.
Considering the foregoing, one can conclude that if the South African expat remains on the South African retirement fund, they will no longer receive the portion attributable to offshore service, tax free. Of significant importance is that they will continue to receive tax free, the proceeds from an offshore retirement fund; if they contributed to such fund during their overseas assignment.
One of the significant advantages for a South Africa expat accepting an overseas secondment (other than international experience) is to accumulate hard currency and where they can keep such amounts offshore; this represents a hedge against possible depreciation of the rand and adds an important element of geographic diversification to the employee’s total retirement portfolio.
The ability to save hard currency via the vehicle of an offshore retirement fund provides an additional and valuable incentive to an expat accepting the assignment, in addition to the benefit of receiving the proceeds tax free.
The problem faced by many employers is that often the costs associated with setting up such a fund are often onerous and may also represent an administrative burden to the company. There are methods to circumvent these obstacles by setting up a low-cost scheme and while the investment choices may not be extensive, they will satisfy the objective of facilitating offshore retirement savings in a hard currency.
Should you need additional information on offshore pension funds, Axiomatic Consultants is well positioned to assist with the implementation of an offshore fund through our global network of providers. Get in touch with us on +27 11 305 1940 or firstname.lastname@example.org.