Towards the end of July 2020, National Treasury published the Draft Taxation Laws Amendment Bill, 2020 (Draft Tax Bill). One of the proposals of the Draft Tax Bill relates to an overhaul of the rule for taking retirement funds abroad.
According to Jean du Toit, head of Tax Technical at Tax Consulting SA, taxpayers may, under the current dispensation, withdraw their retirement funds prior to their retirement date, upon emigration for exchange control purposes, where such emigration is recognised by the South African Reserve Bank – a process known as ‘financial emigration’. “This concession is provided for in the respective definitions of ‘pension preservation fund’, ‘provident preservation fund’ and ‘retirement annuity fund’ – collectively referred to as ‘retirement funds’ – in section 1 of the Income Tax Act,” he explains.
“In accordance with the policy decision to phase out “financial emigration” for exchange control purposes, which was announced in the 2020 Budget Speech, National Treasury and the South African Revenue Service (SARS) have proposed to amend the definitions of the terms “pension preservation fund”, “provident preservation fund” and “retirement annuity fund”,” Webber Wentzel clarifies.
According to Webber Wentzel South Africans emigrating for exchange control purposes are currently able to make pre-retirement lump sum withdrawals from the retirement funds if they financially emigrate for exchange control purposes in accordance with the process prescribed by the South African Reserve Bank.
“The proposal in the Draft Tax Bill is for the payment of lump sum benefits from retirement funds to only be permissible when a member of a retirement fund ceases to be a South African resident and such member has remained a non-tax resident for at least three consecutive years or longer (3-year rule). The 3-year rule will impact all persons who are members of retirement funds and require immediate access to their retirement funds upon emigration.”
Click here to read more about the 3-year rule and the practical issues it raises.