Rushed formal emigration may result in unintended tax consequences
Phasing out the concept of formal emigration is not government’s attempt to stop people accessing their retirement savings
It is unfortunate that the decision by the National Treasury to phase out the concept of formal emigration by March 1 2021, with the aim of further easing exchange controls, has been misrepresented by some as an attempt by the government to block people from accessing their retirement savings.
While the opposite is true, some South Africans are feeling pressured into applying for formal emigration before the end of the current tax year solely to access their retirement annuities (RAs) in full or preservation fund savings where one withdrawal has already been made.
By doing away with formal emigration the Treasury is actually making it easier for most citizens who want to relocate to another country without cutting all financial ties with SA to also access their RA in full and preservation fund savings where one withdrawal has already been made, albeit only after three years. Citizens now have to formally emigrate, which is a complex process with consequences such as bank accounts becoming blocked, before they can cash in their RAs and preservation funds.
The new regulations, contained in the draft 2020 Taxation Laws Amendment Bill, expected to be gazetted shortly, will require South Africans to prove that they are nontax residents for an uninterrupted period of three years from March 1 2021, before they can cash in their retirement savings held in RAs and preservation funds.
The new regulations affect only retirement savings in RAs and cases where members have already made one withdrawal from their preservation funds. Retirement savings in pension and provident funds are not affected, since members are already allowed to withdraw their benefits on resignation. We believe the argument being presented by some that the government is trying to hold on to retirement benefits for the sake of introducing prescribed assets is therefore unwarranted.
While the Association for Savings and Investment SA (Asisa) considered the three-year period too long and unnecessary, and therefore opposed the proposal in the feedback given to Treasury, we did not oppose the principle of levelling the playing field between those who emigrated formally and those who did not. We understand that by phasing out formal emigration citizens who relocate for a period will find it easier to eventually return to SA. Equally, those who decide not to return after three years, and who are not a tax resident, will be able to cash in their retirement savings.
We recommend that South Africans who are panicked about having to rush formal emigration through before the February 28 2021 deadline consider the following and seek professional advice before taking any decisions:
- Applying for formal emigration with the SA Reserve Bank could result in unintended income tax and capital gains tax consequences. Even if the formal emigration application is straightforward and successful, an exit capital gains tax may apply. It is therefore crucial that anyone considering formal emigration consults a specialist tax adviser before making a decision.
- Many South Africans tend to relocate rather than formally emigrate. The option of cashing in an RA and preservation fund will be available to everyone who has moved abroad (after three years of being a nontax resident), whereas this is not possible under current laws.
- The new regulation does not affect pension and provident funds, because members who resign from their employers can already withdraw the benefits, pay the withdrawal tax and take their money out of the country subject to meeting the foreign exchange control requirements.
- Also not affected are preservation funds where the member still has their one withdrawal. This means anyone who has not yet exercised their right to one withdrawal has the option of paying the withdrawal tax and cashing in at any time.
- On reaching the retirement age specified in an RA contract policyholders are allowed to retire from the RA and take a third in cash, which can be remitted offshore subject to meeting foreign exchange control requirements, and buy a compulsory annuity with the rest. The annuity payments would pay into a local account but could then be remitted abroad. The taxation is complex and would be in terms of the double tax treaty with the new country where the policyholder is tax resident.
• Stephan is senior policy adviser at Asisa, and Joffe chair of the Asisa product tax working group.
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