In my previous article ‘Foreign employment income amendments’ (192 tsh 2019), I focused on the tax tests allowing one to achieve nonresident status. The further issue arises of the ability of an emigrant to access his or her retirement funds, and the tax treatment of such access.
(The option exists to retain the retirement benefit value in a retirement fund or alternately transfer it to a preservation fund, with no current tax consequences, but it is assumed here that an emigrant would prefer to access the monies, given a volatile rand.)
Emigration after retirement from a fund in this circumstance, the fund member would already be receiving regular annuity payments from a pension or retirement annuity, which usually takes the form of a living annuity.
The applicable rules are contained in the definition of ‘living annuity’ in s 1(1) of the Income Tax Act, as read with the regulations. A living annuity cannot be commuted (encashed), since the regulations permit only an annual drawdown within the range of 2,5% to 17,5%.
On an annual basis the annuitant can, amongst other things, elect to increase this drawdown to the maximum 17,5% a year, thereby accelerating access to the capital value over a five- to six-year period, to depletion.
The annuity remains fully taxable in the RSA, notwithstanding the emigrant’s tax residency, since its source is in the RSA, unless a tax treaty provides otherwise, in which event the treaty prevails.
In terms of the EXCON Manual for Authorized Dealers (paragraph B3) issued by the SARB, permissible income-transfers abroad include annuity payments originating from a retirement fund.
Emigration before retirement from a fund
In this circumstance, as regards a pension or provident fund, emigration would naturally result in a termination of employment, which would trigger full commutation (encashment) by the fund member, being categorised as a withdrawal for tax purposes.
The general rules for a retirement annuity, pre-retirement, limit access until the attainment of the age of 55, unless there is earlier death or disability.
Nevertheless, an exception exists for a resident who emigrates from the RSA when the emigration is recognised by the SARB for purposes of exchange controls.
The lump-sum commutation would be treated as a withdrawal for tax purposes, and, as for a pension or provident fund benefit, be taxed at the ring-fenced rates, namely, R25 000 tax free, 18% on amounts between R25 001 and R660 000, 27% on R660 001 to R990 000, and a flat 36% on any balance.
Paragraph B2(J) of the SARB Manual permits an emigration allowance of R10 million for a single person and R20 million for family units, plus a travel allowance per person. (The travel allowance is part of the discretionary allowance of R1 million.) Thus the commuted amount from a retirement fund could be exported as part of the emigration allowance.