National Treasury has withdrawn a controversial proposal to tax the foreign retirement benefits received by SA tax residents, which tax experts warned would detract from SA’s attractiveness as a retirement destination and lead to foreign residents leaving the country.
Treasury deputy director-general for tax and financial sector policy Chris Axelson told parliament’s finance committee on Tuesday that the proposal in the draft Tax Laws Amendment Bill was withdrawn pending further consultation.
The Treasury is still investigating the possibility of limiting medical tax credits as a way of funding National Health Insurance.
The Association for Savings and Investment SA, Tax Consulting SA, the SA Institute of Taxation and the SA Institute of Chartered Accountants welcomed the Treasury’s decision to withdraw the proposal to tax foreign-sourced retirement fund income.
The proposed measure would have affected South Africans who worked abroad, returning expatriates and foreign nationals retiring in SA.
“National Treasury is still concerned that SA (through the tax exemption) is giving up its taxing rights on foreign pensions (provided by double taxation agreements) and that the law creates instances of double non-taxation,” Axelson said. This led to revenue losses to the fiscus.
What was needed was to find a balance between the need to protect SA’s taxing right under double taxation agreements, the technical nuances of retirement taxation regimes of several countries, and the role of many expats and foreign retirees’ contribution to the economy.
The Treasury had to ensure that double taxation did not occur where retirement fund contributions had already been taxed and had to consider ways to soften or phase in the effect of possibly higher taxation on retirees. Axelson acknowledged that the proposed change was a big one.
He said the government would initiate a renewed consultative process with stakeholders “to identify a balanced approach that both addresses the stakeholder concerns raised and aligns with the government’s commitment to prevent double non-taxation.”
The draft Tax Laws Amendment Bill proposed that from March 1 2026 and for the years of assessment commencing on or after that date, SA would 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 would apply if the amount derived from past employment outside SA and a double tax treaty did not give the other jurisdiction the sole right to tax the amounts. The proposal would remove the blanket tax exemption for this income granted under the act.
Tax Consulting SA cross-border taxation specialist John-Paul Fraser warned in public hearings by parliament’s finance committee on the draft bill that the proposal risked discouraging skilled foreign nationals and investors from retiring in SA. It also undermined the government’s objectives to attract foreign skills and capital.
Stakeholders noted that many expats and foreign retirees contributed significantly to the economy through consumption and VAT. The repeal of the exemption could discourage skilled professionals and retirees from settling in SA.
There was also the danger of double taxation where tax had already been paid on foreign retirement fund contributions and the problem of retirees who had based their retirement planning on the continued existence of the exemption.
Axelson gave the example of SA tax residents who received a private pension from another country such as France or Germany which are now taxed in those countries. However, the double tax agreement with these countries granted SA the taxing rights but this was nullified by the tax exemption. The amendment would shift the tax to SA and then no tax would be paid in the other country.
“So for the individual there shouldn’t be that much of a change. It will just shift the taxing rights to SA. There will be a change in terms of where they are on the personal income tax table and whether our personal tax tables are different.”
If the tax in the other country was higher, the shift to SA taxation could result in lower taxes being paid and greater disposable income, which could be a win-win situation both for the taxpayer and the SA fiscus.
Where the double taxation agreements allowed for the other country to have the taxing right on retirement income earned there, the proposed amendment would not result in any change.
In the case of the double taxation agreement with the UK where only SA has the taxing right, the tax exemption meant no tax was being paid and there is double non-taxation. “This is not a situation we want to permit and allow to continue though it will have a big impact on those individuals if we remove the exemption,” Axelson said.
The National Treasury has also partially accepted objections to its proposal to impose capital gains tax on unit trust investors in the event of the conversion of shares into unit trust investments. Capital gains tax would still be imposed on asset-for-share transactions but would be effective as of January 1 2027 to allow for further consultation in 2026.
