Ensure you don’t pay tax on pension earned outside SA
Foreign country may however still tax the amounts paid out
The rules are different for a pension earned from an SA source as to one accumulated while working outside SA.
As a general rule a pension received from a foreign source will be exempt from tax in SA, while a pension from a local source is fully taxable in SA.
When you retire and receive monthly pension payments from an SA source, this amount received is subject to normal tax in SA in the same way your salary was subject to tax when you were working.
However, once you have reached the age of 65 years, your annual tax liability is reduced by an increased tax rebate; this means you pay less tax each month on the pension payment you receive because you have reached the age of 65.
If you have either spent your entire working life outside SA and have now retired to SA or have spent some of your life working outside the country, the monthly pension payments you receive as a result of working outside SA may be exempt from tax in SA.
However, you need to meet two primary requirements to qualify for the exemption:
- The pension amount received must be as a result of work done outside SA and contributions made to a foreign pension scheme, that is while you were working out of the country, you contributed to a foreign pension scheme; and
- The amount must be either paid directly to you from the foreign pension scheme or a once-off lump sum must have been transferred from the foreign pension scheme to an SA pension scheme.
Any amount received from an SA pension fund that was not transferred from a foreign pension fund will not qualify for an exemption in SA. In other words, if you work outside the country for a period but continue contributing to your SA pension fund during this period, the amount received from the pension fund upon retirement will not be exempt from taxation in SA.
You may find yourself in a situation where part of your foreign pension was transferred back to your SA pension fund as a once-off lump sum and now forms part of the total amount in your pension. If this is the case, you would need to apportion the amount in your pension fund that was earned from a foreign source and calculate the portion that is exempt from taxation in SA
In addition to a pension amount received in respect of work done outside the country, if you receive an amount under the social security system of another country, this amount will also be exempt from taxation in SA.
Note that the above exemptions are only available to individuals who are SA tax resident. You should be an SA tax resident if you have spent your life in SA and consider SA to be your home. However, if you have lived in another country and have retired to SA you will have to determine whether you have become SA tax resident upon moving to SA. Determining whether you are a tax resident of SA is a complicated area of SA tax law and each person needs to determine their residency status based on their own circumstances.
Please note that while these pension amounts may be exempt from tax in SA, the payouts may be subject to taxation in the country from where the amounts are being paid. Each person will need to consider their own circumstances and the particular country to determine whether these amounts will be subject to taxation in that country from which they receive the pension.
It is, therefore, a good idea to determine whether the pension payments you are receiving as a result of work done outside SA and/or from a foreign source are exempt from taxation in SA to ensure you are not paying tax in SA when you are not required to.
• Baines is a tax consultant at Mazars and author of How to Get a Sars Refund