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South African expats face stricter pension rules

The South African government has tabled a tax relief meaure that would benefit expats stuck in the country during lockdown, while passing a bill that would potentially make it more difficult for them to access their pension funds until three years after they emigrate.

South African expats earning up to ZAR1.25m (£61,000, $81,000, €68,000) through foreign employment need to spend at least 183 days out of the country during a 12-month period, of which 60 days must be continuous, to be eligible for the tax exemption.

But travel bans meant that some may have not been able to comply, putting them at risk of a massive tax liability.

As a result, the Treasury and South Africa Revenue Service (Sars) proposed that the 66-day lockdown period between 27 March and 31 May 2020 be subtracted from the 183-day requirements.

This means that, if an expat spent more than 117 day outside the country, they may still qualify for the exemption.

Good news

Rex Cowley, director at Overseas Trust & Pension, told International Adviser: “The proposed relief to South African expats who are migrant workers but resident in South Africa for tax, and benefit from the Foreign Employment Exemption, is clearly welcomed.

“This amends the emergency measures introduced by the ‘covid-19 tax relief bills’.

“The reliefs and proactive stance clearly show the South African government is serious about looking after their expats, but it would have been ideal if the requirement for the ‘60 continuous days’ to have been reduced by the same factor as days required to be physically abroad.”

Pension headaches

While some expats may enjoy additional tax relief, they face stricter rules when it comes to accessing their pension funds.

This is because, under the Taxation Laws Amendment Bill, they have until 1 March 2021 to transfer their pots out or face having their pensions locked for three years.

Expats will only be able to access their pension “a full three years” after they establish tax residency outside South Africa, Cowley explained.

But he doesn’t think this is necessarily a bad thing because “given the objective of a pension plan being long-term financial security in retirement, this amendment helps protect individuals from depleting such funds which is often on the instigation of what is arguably poor advice from financial advisers”.

Tracy Muller, head of fiduciary advice at Nedbank Private Wealth, believes that the measure will not make it more difficult for expats to take their pension funds out of the country.

“The reality is that the amendment is simply part of government’s clearly stated intention of moving towards a more modern, transparent, and risk-based exchange control approvals framework.

“To this end, this is just one of many changes that we can expect to see being made to exchange controls in the coming months and years.”

‘Many nuances’

Muller told IA the government is trying to remove distinctions between ‘emigrants’ and ‘residents’, “by leaving only the tax concepts of a resident and non-resident together with the introduction of a three-year tax rule being applied to individuals who are non-resident for tax purposes before retirement funds may be externalised”.

“The current exchange control regulations incidentally have a similar rule; albeit for a longer period – ie if you emigrate and return to South Africa within a five-year period, you will be regarded as a ‘failed emigrant’ and the South African Reserve Bank can force repatriation of any assets externalised as part of an emigration application.”

But the process of becoming tax resident is not as simple as just emigrating, Muller warned.

She explained that there are currently two distinct and separate processes that need to be followed to emigrate:

  • Cessation of tax residence – to cease to be a South African tax resident and become a non-resident for tax purposes; and,
  • Formal emigration from an exchange control perspective – to become designated as an ‘emigrant’ for South African exchange control purposes.

“Ultimately, the amendment means that, as of 1 March 2021, individuals will no longer be required to emigrate to be able to externalise certain retirement and pension lumpsums; but in certain respects will be required to become a ‘non-resident’ for tax purposes in order to be able to externalise certain retirement lumpsum funds.

“Given the many nuances relating to emigration and the concepts of resident and non-resident for tax purposes, it is imperative that individuals who find themselves in a position where they may be impacted by this change seek professional advice before making any hasty decisions.

“Ultimately, there is much more to emigration, and the decisions around it, than tax; and it is imperative that you don’t allow those decisions to be informed by fear or misunderstanding. As with any action that may impact on your long-term financial situation or plan – professional advice is vital.”

‘Easy target’

But Greg Atherstone, director at Singepore-based Tallrock Capital, is a bit more sceptical of the move, which he attributes to the South African government’s “desperate” need for funds.

He told IA: “Holding funds in an emerging market always has risks and rewards. Generally speaking, your returns are higher, yet drastic changes could occur like what we will witness in the coming years.

“The South African government desperately needs funds and they have nearly exhausted the tax options which leaves pension money an easy target. If that money is spent on infrastructure to drive economic growth and employment it is an excellent use of funds. Sadly, misuses of funds have occurred time and time again and why would this time be any different?

“Those expats who have financially migrated would be wise to seek professional help and analysis as to whether it is better to move their pension out of South Africa or leave it.

“The 1 March 2021 deadline is fast approaching so it’s best to act now before you are caught-up in realms of paperwork and heartache.”

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