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A stricter verification process and risk management test is in the works, if the February 2020 budget speech is anything to go through.
- Current legislation allows a person who has formalized their emigration through the “financial emigration” process, to withdraw their retirement funds in full once the process is complete.
- President Cyril Ramaphosa, however, enacted the Tax Laws Amendment Act, effective as of March 1, 2021.
- The consequence is that, from that date, certain retirement benefits will be immobilized for a minimum period of three years.
President Cyril Ramaphosa has enacted the 3-Year Retirement Fund Lockout Act as part of the Tax Law Amendment Act and it will take effect as of March 1, 2021.
Current legislation allows a person migrating from South Africa who has formalized their emigration through the “financial migration” process to withdraw their retirement funds fully when the process is complete. This would include, for example, the withdrawal of a retirement annuity, before the maturity of that fund.
Retirement fund members generally can only access their retirement fund benefits when they reach retirement age, that is, 55 for retirement annuity members and preservation fund members who have already taken the only retirement previously allowed. However, the definition of pension preservation fund, provident preservation fund, and retirement annuity fund in the Income Tax Act allows a fund member to withdraw the full value of his fund before retirement if ” formally emigrate “from South Africa.
However, the tax laws amendment bill provides for the payment of a lump sum benefit from the retirement fund when a member ceases to be a tax resident in South Africa and has been a non-tax resident for a period of at least three years in a row. The three-year waiting period applies only to preservation funds and retirement annuity funds.
“The consequence is that, as of March 1, 2021, retirement benefits will be locked in for a minimum period of three years,” says Jonty Leon, legal manager (tax for expats) at Tax Consulting South Africa.
“The current situation has been helpful to many South Africans who have left or are currently leaving, as these funds are often used to settle in their new home country. It also allowed taxpayers to decide to withdraw their investment and invest in something more viable for their new circumstances, ”says León.
“South Africans who have already emigrated economically still have the opportunity to withdraw their retirement funds under the current regime. Those who have completed economic emigration, or who have submitted their full application to the South African Reserve Bank (SARB) before 28 February 2021, they now have the opportunity to withdraw their retirement funds under the old dispensation until February 28, 2022. ”
After March 1, 2021
Without economic emigration, and as of March 1, 2021, taxpayers will only be able to access their retirement benefits if they prove that they have been non-residents for tax purposes for an uninterrupted period of three years.
“It has not yet been established how the new system will practically function, taking into account the requirements of the policy provider, the requirements of the SA Revenue Service (SARS), the need for supporting documentary evidence and proof of non-resident status. for three consecutive years. ” says Leon.
He cautions that a stricter verification process and risk management test are in the works, if the February 2020 budget speech is something to be followed.
“The immediate disadvantage for those who will not be able to withdraw these funds as soon as they need them is evident. However, the long-term disadvantages of a lockdown period, which come with much more uncertainty, must be considered as well.” says Leon.
“The 2020 Budget Speech talked about the relaxation of regulations around exchange controls, which is in stark contrast to the legislation passed, which effectively traps retirement funds in South Africa. There are no guarantees that the government will not decide to extend the period of three years for another three years, or perhaps indefinitely. “
Lock impact
Jean du Toit, Head of Fiscal Technician at Tax Consulting SA, points out that taxpayers resident in South Africa who earn their remuneration in respect of services rendered abroad, may qualify for an income tax exemption of up to R1.25 million .
To qualify for the exemption, the Income Tax Act determines that taxpayers must spend more than 183 days in total outside of South Africa during a twelve-month period, of which more than 60 days must be continuous. However, due to travel bans imposed as a result of the Covid-19 pandemic, many of these people were unable to travel to their countries of work. For many, this would mean that they would not have reached the 183 day threshold, resulting in an unexpected tax liability in South Africa.
The Tax Law Amendment Act lowers the 183-day threshold by 66 days, which means that taxpayers who spent more than 117 days outside of South Africa can still qualify for the exemption. The 66-day reduction is based on the period that began on March 27, 2020 and ended on May 31, 2020, when the country operated under Covid-19 alert levels 5 and 4 of total lockdown, explains Du Toit.
“The continuous period of more than 60 days remains unchanged; the grant only extends to the total number of days spent outside of South Africa. Equally important, this amendment does not constitute a permanent change to the exemption. It only applies to any 12-month period with respect to any evaluation year ending on or after February 29, 2020, but on or before February 28, 2021, “it says.
“It is important to understand that you can take advantage of the exemption for several fiscal years. This principle, which can be called ‘double dip’, can be difficult to apply correctly. This will be the case in particular in the context of the amendment because it is restricted to periods “Very specific. But it still applies, and taxpayers need to plan proactively to make sure they use the exemption correctly and to their best advantage.”
