In July 2021, the Draft Tax Law Amendment Bill proposed an amendment that included an additional exit tax on the interest component of retirement vehicles after taxpayers ceased their tax residency with South Africa. This proposal created a stir because the retirement vehicle in question would already be subject to a 3-year lock-in rule, which meant that after ceasing their residency, they would not gain access to their retirement savings for another three years, during which a taxable interest would have been generated.
The cherry on top was that this proposed amendment would also override existing Double Taxation Agreements (DTA), which are international agreements meant to protect taxpayers from paying tax in both jurisdictions on income generated. Had the amendment been gazetted, the individual would have been liable to pay tax on the interest in both jurisdictions, which would contravene the treaty between the two countries.
The knock-on effect of amending tax laws, especially those pertaining to personal income tax and cross-border taxation, often hits expats the hardest. During an online launch of the revised edition of Expatriate Tax: South African Citizens Working Abroad and Foreigners in South Africa, it became clear that the prickly topic of expat tax is never a clear-cut case, even for tax professionals, and that staying abreast of tax law changes is of phenomenal importance.
The fight is far from over
In their communication to stakeholders, Treasury said that they will withdraw the amendment for now with the aim of reconsidering it in the next tax law amendment cycle, thereby admitting that it is not off the table by a long shot. The South African Revenue Service (SARS) wants the tax on retirement interests when South Africans emigrate – and they will find a legal way to get their hands on it, even if it means amending DTAs to do it.
The concern for expatriates is not that SARS was trying to sign a misbegotten amendment into legislation, or that they were hoping to get it passed and implemented in record time. What is more troubling, is that they have not foreseen the consequences of drafting the amendment. The fact that SARS is prepared to blindly wade into unchartered waters where they could be transgressing international treaties by aggressively pursuing domestic law changes, is enough to make one’s hair stand on end.
Of late, SARS has made every effort to become a smarter revenue service. They have carefully amended certain laws to enable a swifter response towards ensuring tax compliance, sometimes by means of legal prosecution through the National Prosecuting Authority or by means of High Court judgements to attach assets in lieu of arrears due to SARS.
They are so set on closing the expatriate tax gap and chasing foreign-earned income, that they have resorted to making erratic amendments. Regardless of this little setback, SARS is hard at work to find another way to achieve this end.
Your intent will determine what you do next
Everything hinges on whether you intend to return to South Africa. If you are still not sure about permanently relocating to another country, then you can take comfort in knowing that a DTA could still hold SARS at bay to a significant degree, particularly when it comes to personal income tax relief. SARS’ proposed amendment indicates that the DTA is a problem area for them where it involves retirement funds.
Make sure your tax consultant understands the intricacies of the DTA that is in place between South Africa and the country you are working in. When in doubt, get a second opinion or work through the DTA requirements yourself on SARS’ websites. Failing which, Tax Consulting South Africa is conducting a world tour that kicks off in the Middle East early next year, with their primary focus on educating expats about their tax obligations under a DTA. In pursuit of clarity, expats would do well to raise their concern at these events.
However, where it is your intention never to return to South Africa, there has never been a better time to finalise your move. While the dust settles on the amendment debacle, it creates a small window of opportunity for expats who want to cease their South African tax residency without incurring surprise exit tax charges in the process.
By formally ceasing your tax residency with SARS and completing financial emigration, you will be cutting your financial ties with South Africa before SARS finds a way to tax the future values of your life savings.
Victoria Lancefield
Thomas Lobban
