Government has thrown a considerably large spanner in the works for South Africans wanting to leave the country and start over somewhere else. The spanner comes in the shape of the proposed Draft Taxation Laws Amendment Bill, 2020 (Draft Tax Bill) published by the National Treasury for public comment recently.
The most contentious proposal is for the payment of lump sum benefits from pension preservation funds, provident preservation funds and retirement annuity funds (retirement funds) to only be permissible when a member of a retirement fund ceases to be a South African resident and such member has remained a non-tax resident for at least three consecutive years or longer. The Treasury has called this the 3-Year Rule.
The proposed Draft Tax Bill seems a little rough around the edges and not thought through very well. Here are three problems we’ve identified with regards to the effects it will have on taxpayers.
1. Blocks funds when they’re needed most
The main problem with the rule is perhaps the most obvious, and most debilitating. Setting up a new life comes with a hefty price tag. When someone emigrates, they need access to their savings first up to help with the fresh start. Waiting for three years in a foreign country for money you needed right away will only lead to financial hardship.
2. Biased against those already emigrating
Additionally, the rule does not consider the position of retirement fund members who financially emigrate shortly before it commences. Those who have started the financial emigration process but have not completed it by 1 March 2021 – the proposed commencement date of the 3-year rule – will also be prejudiced.
3. Disregards other rules
The rule completely disregards another rule on emigration already in place, namely that a person is considered to be a South African tax resident whether that person is either ordinarily a resident in South Africa or is deemed to be a tax resident by complying with the threshold requirements of the physical presence test. Furthermore, it’s at odds with the definition of a resident in the Income Tax Act, 1962 (Income Tax Act).
Our Recommendation
The Treasury’s stated purpose for the 3-year rule is to phase out “financial emigration”, which is the idea that South Africans emigrate for exchange control purposes. They have also stated that they don’t think the purpose of retirement funds is to fund an individual’s emigration, adding that the tax advantages of investing in retirement funds come with conditions. Even though it is unlikely that they maliciously set out to hamstring individuals financially as soon as they arrived in a country they hoped to emigrate to, the proposal seems haphazardly put together and poorly thought through.
“We implore government to carefully reconsider the implications before moving ahead with the 3-Year Rule and consult with the representatives of the financial industry,” says Roshan Chiman, Chief Executive Officer of KHUSA Consulting. “The practical problems together with the massive ramifications such a policy change will have on taxpayers’ – whether they reside in SA or elsewhere – lives are of a magnitude that warrants careful consideration.”
Who are we?
KHUSA constantly strives to provide innovative benefit solutions to corporate South Africa. We have a positive approach to all things risk management and specialise in the delivery of commercial risk, healthcare and retirement funding services. Our name carries our philosophy: tomorrow’s growth. A goal we maintain is achievable by finding solutions to today’s problems.
For more details visit www.khusa.co.za