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South Africa exempts foreign pensions from tax

South Africa exempts foreign pensions from tax

CAPE TOWN: The South African Revenue Service (SARS) issued Binding General Ruling 25, which aims to resolve the disputes that have arisen between SARS and some taxpayers whose pensions are partly or entirely the result of employment outside the country.

Marika Muller, the deputy spokesperson for SARS, says existing disputes over pensions from foreign employment will be dealt with according to the ruling.

A section of the Income Tax Act exempts from tax any pension received by or accrued to a resident from a source outside South Africa for past employment outside the country, Jenny Klein, a tax manager at ENSAfrica, says.

The ruling means that a pension that accrues for services rendered outside South Africa by a South African resident will generally not be subject to tax in this country, the South African Institute of Chartered Accountants (SAICA) says in a statement. If the services were rendered both in South Africa and abroad, the portion of the pension to qualify for the exemption will be calculated using a formula where the period of employment abroad is a ratio of the total period of employment.

South Africa taxes the world-wide income of its residents, so payments received for services rendered outside the country are included in their gross income. But these payments may subsequently be excluded from their taxable income in terms of any available exemptions, Klein says.

“Gross income” is your total income before taking exemptions, deductions or allowances into account, whereas “taxable income” is your income after tax exemptions, deductions or allowances.

Over the past few years, SARS has taken the view that, for the exemption to apply, “source outside South Africa” meant that the services must have been rendered outside the Republic and the fund that pays the pension must be located outside the country, Klein says. In other words, if you remained a member of a South African-registered fund while working abroad, none of your pension benefits qualified for the exemption.

Tax experts say the ruling now confirms what taxpayers and tax practitioners have always regarded as the status quo: that the exemption depends on the “originating cause” (namely, employment abroad) of the pension benefit and not where the pension fund that pays the benefit is domiciled.

In the 2014 Budget Review, Treasury says: “South African residents working abroad and foreign residents working in South Africa regularly contribute to local and foreign pension funds. With overall retirement reform now in effect, cross-border pension issues need to be reconsidered. Given the complexity of the issues involved, it is proposed that the review take place over two years, with extensive consultation.”