Although there has been an increasing trend in recent times of emigrations from South Africa, there are many projects by the Department of Home Affairs to market South Africa as a friendly retirement destination for foreigners. The question, therefore, often arises: How will foreign pensions be taxed locally once persons become tax resident.
The Income Tax Act, in section 10(1)(gC), allows for an exemption of any amount received or accrued by a resident under the Social Security System of another country, or a lump sum, pension or annuity received by any resident from a source outside of South Africa. For this exemption to apply, the employment which gave rise to the funding of the foreign pension should be as a result of past employment outside of South Africa as well.
The term “past employment outside the Republic” refers to foreign services (employment). Only the portion of the lump sum, pension or annuity that relates to foreign services will be exempt from normal tax. Amounts that are not related to foreign services will therefore not qualify for this exemption. Interpretation Note 104, issued by SARS on 18 October 2018, specifically deals with the exemption from foreign pensions and transfers.
A lump sum, pension or annuity received by or accrued to a resident from a local retirement fund or insurer will not qualify for exemption, except in cases where an amount has been transferred to that local retirement fund or insurer from a source outside the Republic.
An apportionment calculation is available in the instance where services are rendered outside as well as in the Republic. The main aspect for consideration is that the lump sum, annuity or pension is linked to employment outside the Republic, as consideration for foreign services rendered. The following formula (which is applied on a time-based apportionment) is used to calculate the portion of a lump sum, pension or annuity that will be exempt as a result of services rendered outside the Republic:
- Foreign services rendered divided by Total services rendered multiplied by Total amount received or accrued
Although South African tax residents are taxed on their global income, exemptions are available, and taxpayers should be aware of these, to ensure that they claim exemptions to which they are entitled. Importantly, the fact that an amount is exempt does not imply that it does not require to be disclosed to SARS. The full amount must still be included in income in the tax return, but the relevant exemptions will then be applied – full disclosure, therefore, remains a requirement.