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FINANCE: Foreign Exemption Of Pensions


Recent Gauteng Business News

Until recently, both resident and non-resident taxpayers were able to obtain tax-friendly treatment on their pension and lump sum benefits accruing from pension funds located in South Africa. Unfortunately, things have become a little more complex. Citadel Strategic Director: Tax and Fiduciary, Madeline Schubert, explains the new tax legislation and its implications below:

In terms of the South African Income Tax Act, non-residents are only liable for tax on South African source income, whereas resident taxpayers are liable for income tax on their world-wide income. This previously meant that for a resident, all income, whether local or foreign, would be included in gross income. Relief was then sought, however, in terms of an exemption for income from pension funds located outside of the country.

Section 10(1)(gC) of the income tax act provides such an exemption to South African residents on the basis that it exempts pensions received by residents from a source outside South Africa.

Historically, this has been quite confusing. The source of services was therefore clarified by section 9(1)(g), which deemed pensions to be from a South African source if the services in respect of which such payment is made were performed in South Africa for at least two years during the last 10 years, immediately preceding the date from which the pension/annuity became due. This meant that pensions that accrued to a person not falling foul of the 2/10 year rule were exempt in full from income tax. This was, however, still very confusing, so the rule was deleted and replaced by a section 9(1)(i), which now clarifies source for purposes of pensions.

In short, lump sums and annuities are deemed to be from a South African source if the services in respect of which these accrued were rendered in South Africa. If, however, the services were partly rendered in South Africa and partly not, only the portion that relates to the South African portion over total service years will be deemed to be from a South African source.

Section 10(1)(gC) will exempt the portion that relates to the income attributable to services rendered outside South Africa for residents, while non-residents will be taxed on the portion that is regarded to be from a South African source.

An important note to make is that the location of the fund is irrelevant when the source of a pension is to be determined. If, however, the fund is located in South Africa, the abovementioned taxation rules with regards to non-residents are reasonably easy to enforce. In the case where a non-resident has worked historically in South Africa and contributed to a non-resident fund, however, a tax liability will nevertheless arise for such a non-resident on “source”, but the enforceability of such taxation becomes impossible as neither the non-resident nor the fund is located in South Africa. Hopefully, such a non-resident will pay tax in his/her resident tax country.

On 3 November 2013, the South African Revenue services (SARS) issued a Private Binding Ruling 156, which confirmed that from now on, non-residents will be liable for South African income on pensions received if these arose from services rendered in South Africa. In this instance the fund was a registered South African Pension Fund.

On 14 November 2014, SARS issued a Binding General Ruling 25 which confirmed that section 10(1)(gC) would exempt pensions that accrue to a resident to the extent that those pensions arose from historic employment services rendered outside South Africa. It confirms that the originating cause of the pensions is historic services rendered (and the place where it was rendered) and not where the fund is located.

Both rulings are, in our view, given in accordance with the tax legislation as it currently reads.

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