Tax professionals and the retirement industry have warned that the Treasury’s proposals to change the tax treatment of retirement benefits accruing to people who worked abroad and return as residents to SA will negatively affect investment and SA’s attractiveness as a relocation destination.
The draft Tax Laws Amendment Bill proposes that from March 1 2026 and for years of assessment commencing on or after that date, SA will have the right to tax any lump sum, pension or annuity received by or accrued to a resident from a source outside the country except from a social security system.
This will apply if the amount derives from past employment outside SA and a double tax treaty does not give the other jurisdiction the sole right to tax the amounts.
The proposal will remove the blanket tax exemption granted under the act for retirement benefits received by an SA resident from a source outside SA arising from employment outside SA as a nonresident. This will affect South Africans who worked abroad, returning expatriates and foreign nationals retiring in SA.
Exemption removal alarms expats
A cross-border taxation specialist from Tax Consulting SA, John-Paul Fraser, warned in public hearings by parliament’s finance committee on the draft bill on Wednesday that the move risked discouraging skilled foreign nationals and investors from retiring in SA. It also undermined the government’s objectives to attract foreign skills and capital.
It was clear from his consultations with people considering retiring to SA, Fraser said, that the proposal was a material consideration and could dissuade them from doing so as well as lead others already living in the country to leave. “There is a lot of nervousness about it. The economy will probably take a bigger hit than what we would recover from foreign pensions.”
He noted that the foreign pension exemption had been in place for more than 24 years, providing consistency and certainty for taxpayers who had planned their retirement for decades under the exemption. Many had done so, assuming the exemption would continue, and would be unable to restructure their affairs at this late stage.
The proposal also unfairly disadvantaged taxpayers from countries without compulsory social security systems who relied on voluntary retirement contributions, as the exemption would continue to apply to those who received retirement benefits from such systems.
Fraser suggested alternative solutions such as introducing partial exemptions, relief through tax treaties and distinguishing genuine retirement savings from avoidance schemes.
Returning expats and economy hit
Angus McDonald, senior policy adviser on tax of the Association for Savings and Investment SA (Asisa), told MPs many expatriates moved back to SA, and the proposal would remove SA as an attractive retirement location and might cause expat residents to leave SA, with a concomitant loss of their spending in the economy.
“The removal of the exemption assumes that the SA resident obtained tax relief on their contributions in the country in which the employment was rendered or … that the growth in the foreign retirement fund itself was exempted from tax in that country. This is not always the case,” McDonald said.
He said the proposed change would hurt SA resident retirees who were dependent on the current exemption, who were often a financially vulnerable group of taxpayers and who would be placed in a financially precarious position.
Calls to delay proposal
Senior tax executive at the SA Institute of Chartered Accountants Pieter Faber suggested that the Treasury postpone the proposal pending the finalisation of a comprehensive review. If it were retained, the effective date should be deferred by three years to enable pensioners to factor in the reduction in their pension.
The Treasury explains the reasons for the proposal in the memorandum to the draft bill, saying the exemption poses the problem of double nontaxation, particularly if the foreign jurisdiction did not tax the retirement.
In these cases, neither SA nor the foreign jurisdiction impose tax on the retirement benefit. Treasury says this undermines SA’s residence-based system of taxation and leads to the fiscus forgoing revenue.
The exemption was designed to prevent double taxation on retirement income already taxed in the foreign jurisdiction or earned while a person was not subject to SA tax. SA residents who worked abroad and contributed to a foreign retirement fund qualify for the exemption in SA.
Another issue, the Treasury says, is that if a double taxation agreement grants SA the exclusive right to tax such retirement benefits based on residence, SA forfeits this right by maintaining the exemption.
“As a result, the foreign jurisdiction, despite lacking primary taxing rights under the treaty, may choose to tax the retirement benefits because SA does not tax them,” the memorandum notes.
“This misalignment allows the foreign jurisdiction to benefit from taxing rights that SA does not exercise. The SA fiscus ultimately forgoes revenue that it is entitled to collect.”
