Q&A: Why has the tax on my annuity changed?
Changes made to the Income Tax Act in 2017 removed the foreign service tax exemption in retirement funds for SA residents
Q: Since 1984, a portion of my retirement benefit (annuity) has been sourced outside SA and described on my IRP5 as “code 3714 Other Allowances — non-taxable” and on the monthly payslips as “non-SA pension”.
Suddenly on the 2019 IRP5 they have lumped it with the main taxable annuity reflecting it as taxable. I have queried it with Alexander Forbes (who administer it) but they seem confused and are taking a long time to respond.
Has the law changed regarding such offshore income? I am a permanent resident and citizen of SA and have been since birth. — Gavin Barnett, via e-mail
A: Jenny Gordon, head of retail legal at Alexander Forbes replies:
Changes made to the Income Tax Act in 2017 removed the foreign service tax exemption in retirement funds for SA residents.
Until then there had been an exemption for pensions and lump sums paid to residents from foreign funds and local funds where your contributions were in respect of employment outside SA.
To the extent that you worked both in and outside SA, an apportionment of the tax was allowed.
The law changed with effect from March 1 2017.
From that date members of SA pension, pension preservation, provident, provident preservation and retirement annuity funds (SA fund) who rendered services outside SA but continued to contribute to a SA fund, no longer qualified for any tax exemption when they withdraw or retire from the SA fund.
In addition, the exempt portion of pensions and annuities currently being paid fell away and the full payment is now taxable.
As of March 1 2017, the tax exemption only applies to retirement benefits from foreign retirement funds and to a limited extent to amounts transferred from a foreign retirement fund to a local one.
The effect of the change is that administrators like Alexander Forbes are obliged to deduct PAYE from the entire annuity instead of only a portion and this will have reduced some retirees’ pensions.