Proposed tax change to hit foreign retirement funds

One of the controversial tax proposals in the budget tabled in parliament on Wednesday by finance minister Enoch Godongwana is a change to the cross-border tax treatment of retirement funds.

Institute of International Tax and Finance CEO Michael Kransdorff said in a statement that the change could chase away much-needed skills, capital and investment as it would have consequences for foreign professionals moving to SA and expatriates returning to the country after working abroad.

Under current tax rules, foreign retirement lump sums, pensions and annuities received by SA tax residents were exempt from taxation, particularly if they related to work done abroad before relocating to SA, said Kransdorff.

The budget proposes a change that will subject expatriates and returning South Africans to full taxation on their foreign-earned retirement income.

The Treasury said in the tabled Budget Review that the current treatment of cross-border retirement funds could result in double non-taxation “particularly where SA is granted the taxing right by treaty. It is proposed changes be made to the rules that currently exempt lump sums, pensions and annuities received by SA residents from foreign retirement funds for previous employment outside SA.” 

The Treasury envisaged the amendments would be made in the current legislative cycle. 

Kransdorff does not believe the proposed tax change will generate much additional revenue but risks damaging the economy for minimal gain. 

“SA is already struggling to attract and retain the talent it desperately needs. According to Stats SA, 45,866 South Africans returned home in 2011, but by 2022, that number had dropped to just 27,983. SA received only 3,645 retirement visa applications in the last two years.

“The government should be rolling out the red carpet for returning expats and foreign retirees, not increasing taxes on them. These are the people who buy houses, provide crucial skills, start businesses and create jobs. 

“Other countries are actively competing for these groups by offering favourable tax policies. For instance, Greece taxes foreign retirees at a flat 7% for 15 years, while Mauritius offers zero taxation on foreign pensions. Portugal’s Golden Visa programme has attracted billions in investment by offering favourable tax treatment to expats and retirees. SA, on the other hand, seems to be heading in the opposite direction.” 

Kransdorff advised SA tax residents with foreign pensions and retirement funds to urgently review and restructure their financial affairs as there were opportunities to mitigate the impact of the proposed changes. 

ensorl@businesslive.co.za