For South Africans residing abroad, the prospect of accessing their local retirement benefits after three years of tax non-residency presents a unique financial opportunity. However, this can quickly come to involve an intricate dance between the taxpayer, SARS, and their local revenue authority, and the need for a nuanced understanding of double tax agreements (DTAs).
Setting the Scene: Emigration Encashment
When encashing one’s South African retirement benefits after ceasing tax residency more than three years prior, the relevant retirement fund provider must secure a tax directive from SARS to determine the amount of tax to be withheld.
Often, in the understanding of the relevant retirement fund providers, South Africa has the right to tax these amounts as they arose from a source in South Africa. In most cases, this is true. However, in certain cases, South Africa has a DTA in place that may say otherwise.
For example, the DTA between South Africa and the United Kingdom (UK) provides that, in general, a taxpayer may only be taxed on their retirement benefits in the country where they are a tax resident.
This means that, if you are a UK resident at the time that you encash your South African retirement fund benefits, only the UK has a right to tax you on the retirement benefits encashed. Importantly, it does not matter whether the UK will actually seek to tax the amount – just that they have the right to.
However, thus comes the spanner in the works – SARS issues the retirement fund benefit encashment directives without accounting for DTA relief. In other words, a subsequent refund claim is necessary, which starts by filing a return with SARS for the relevant tax year (i.e., after the end of that tax year).
The Tax Treaty Gambit
In the context of retirement benefits, a DTA could mean potential relief for individuals. This is especially welcome when it means recouping part of one’s nest egg. However, understanding the provisions of a DTA in place and how to claim a refund in terms thereof is also crucial from a compliance perspective. And there is one reason for this: double taxation.
In tax, where you are tax resident is generally where you are taxed on worldwide amounts. Oftentimes, taxpayers may claim a tax credit in their resident country for any taxes levied on the same income in the country where it arose from. Put simply, UK tax could be reduced proportionally to the tax already withheld on the retirement fund benefit in South Africa.
However, this would not be correct where the tax was not correctly levied in South Africa. In that case, the taxpayer should claim a refund for the tax incorrectly withheld in South Africa. If the taxpayer in our example goes ahead and claims a foreign tax credit in the UK, and the UK tax authority (HMRC) discovers this, the foreign tax credit may be retroactively disallowed and with the taxpayer then having a compliance issue on their hands.
Opposite Day
DTAs are agreements between countries designed to eliminate double taxation on the same income, and to facilitate economic cooperation. From a procedural standpoint, however, it seems that SARS has placed the cart before the horse and these taxpayers are placed at a disadvantage with no reprieve.
Consider this: tax has been withheld on your encashed retirement benefit in South Africa; you will now also owe tax on the same (pre-tax) amount in the UK; and you have to wait until you file your next tax return before you can claim back the South African tax incorrectly withheld.
While, with proper planning ahead of time, one may potentially face more opportunity than risk when it comes to DTA relief, this still highlights the importance of proper research and professional guidance – and in this case, good timing in view of the different tax years at play in each country.
It Pays to Plan
“A good plan is like a road map: It shows the final destination and usually the best way to get there.”
– H. Stanley Judd.
Navigating the complexities of international tax can be intricate, and the potential for a refund certainly adds a layer of financial opportunity that individuals should not easily overlook. But it is equally important to have a keen understanding of the compliance implications that a DTA may give rise to. Striking this balance is like holding the winning hand in a poker game – you still need to play your cards right.
Have you encashed your retirement fund benefits in South Africa after ceasing tax residency?
About the Author
Thomas Lobban
Principal Consultant at Ibex Tax
LLB, LLM (Tax Law), GTP (SA)
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