It has become a trend in South Africa for the government to overextend when it comes to taxing prospective and actively emigrating South Africans. A recent proposal is a case in point – it has caused a flurry of emotions and could result in legal challenges.

By Savannah Dawson, junior consultant at Sentinel International

In recent years, the South African government has embarked on a taxation expedition specifically targeted at SA tax residents living aboard. No doubt, there has been an exodus of taxpayers who have decided to work and live overseas, which has taken a tremendous toll on the tax base.

In February 2021, in a bid to further prevent base erosion, President Cyril Ramaphosa ratified an amendment to the Income Tax Act preventing South African tax residents from withdrawing their retirement savings unless they have ceased to be tax residents for a period of three consecutive years.

But here’s the snag for SARS: Emigrants are liable for a 36% tax fee imposed on any lump-sum withdrawal valued at more than R1 million, which includes retirement savings. However, since emigrants are now unable to withdraw their savings immediately, they are also unable to pay the tax.

Initially, the government decided to defer the tax liability to such time that the emigrant could withdraw the funds, but they have since backtracked and are proposing a new amendment to that seeks to impose interest on the deferred tax liability.

 This is clearly problematic, impractical and potentially unlawful – here’s why.

Impractical

There is no detail about the practical application of the proposed amendment. How will the interest fee be imposed? Usually, interest on overdue payments is levied daily by SARS as a penalty, but there is no clear directive on how the interest will be levied on retirement withdrawal tax. If SARS levies interest daily, will that interest also be payable daily?

Then there’s the inherent unfairness of the proposal, which seems to be nothing more than a penalty for being a non-tax resident of South Africa. Charging interest on retirement savings is tantamount to abuse by the government; a cynical way to fix a tax problem that they themselves created when they imposed the three-year withdrawal condition in the first place.

Furthermore, should a person cease to be a South African tax resident but return before the three-year threshold has lapsed, will they still be liable for the interest levied on the tax liability? Will there even be a tax liability? Again, there is no information about this in the proposal.

Unlawful

Building on the above, the true issue arises when you considering the legal basis (or lack thereof) on which interest can be levied on a retirement withdrawal.

In terms of common law, interest can be levied on any outstanding debt that is due and payable. When a person ceases to be a tax-resident of South Africa, the day prior to such cession, that person is deemed to have disposed of all of their assets to themselves. This tax event triggers Capital Gains Tax in terms of section 9H, and also triggers taxation on lump-sum benefits according to paragraph 2(1)(b)(ii) of the Second Schedule.

However, since the new requirement delaying the withdrawing of retirement savings was implemented, such tax liability is not yet due and payable, and should therefore not be subject to the interest “penalty”.

Add to this that individuals are unable to pay the tax due to the deferral, and thus cannot prevent incurring additional interest. Administratively, if you are barred by legislation to access the very funds needed to extinguish the debt incurring interest, such legislation would be seen as contra bonos mores, or against good morals.Put simply, the proposed amendment in its current form is unlawful and prejudicial to tax residents ceasing their tax residency.

Double taxation

In addition to the issues mentioned above, one must also be aware of any Double Taxation Agreements (DTAs) in place with foreign jurisdictions, which might allocate tax rights to the other contracting state and not South Africa. Although the new amendment does make provision for a rebate against South African tax imposed, this could still be problematic in the foreign jurisdiction depending on the nature of the DTA in question. In a worst-case scenario, the proposed amendment could mean that emigrants are taxed even more harshly depending on where they are moving to.

At the end of the day, emigrating is not a simple matter. You need to be aware of all the existing tax and legislative pitfalls and prepare for any potential pitfalls looming on the horizon. Expert estate planning is necessary prior to taking the leap and moving overseas in order to ensure the most protection. The latest proposed amendment is yet another example of why professional planning is so important.