Retirement funds and emigration - what the law says

Jenny Gordon

By Jenny Gordon, Head: Technical Advice: Investments, Product and Enablement, Alexander Forbes

Several amendments to the Income Tax Act will come into effect on 1 March 2021, and those who intend on emigrating should be aware of how the changes impact them.

With effect from 1 March 2021, the South African government intends phasing out the exchange control treatment of individuals and replacing it with a more stringent verification test for Individuals that want to transfer more than their R10 million investment allowance out the country. 

This will include a risk management test; with certification of tax status; source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act. 

The tax treatment of South African tax residents who earn money outside the country will also be strengthened. Under the new system, natural person emigrants and natural person residents will be treated identically. 

Additional restrictions on emigrants – such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa – will been repealed

Following these announcements, the Income Tax Act has been amended.

South Africans who have lived outside the country and have informed SARS of their non-resident status with SARS for three years or more, will be able to withdraw their retirement annuities and preservation funds when a new law comes into effect, writes Jenny Gordon, Head of Retail Legal Support at Alexander Forbes

The South African Reserve Bank’s decision to phase out emigration for exchange control purposes will mean that members of retirement annuities and preservation funds can make a full cash withdrawal, but only if they haven’t lived in South Africa for three years and have non-resident status with SARS for 3 years.

Members who have already officially emigrated or whose emigration applications are in by 1 March 2021 and approved by 27 February 2022 will not have to wait the three year period.

These amendments to the Income Tax Act, will come into effect on 1 March 2021.

At the outset, it is important to note that the “emigration/three-year rule” applies to members of retirement annuity funds and preservation funds only. It does not apply to pension funds. Where the member has retired from employment and is a deferred member of a pension fund, that member will have to transfer to a retirement annuity fund or preservation fund and exercise the rule from there.

In relation to members of preservation funds, the emigration rule is only relevant where the member has already exercised the right of one withdrawal before retirement and, in the normal course, must await retirement date after age 55.

In relation to a provident preservation fund, it is only relevant under age 55, where the member has already taken the one permitted withdrawal before retirement. In a provident preservation fund, after age 55, the full amount can be taken in cash on retirement. It is important to note that, if the member still has a right to a withdrawal benefit before retirement, that member is not affected by this change at all, and may withdraw in terms of the normal rules applicable to preservation funds.

A member of a retirement annuity fund is only permitted to retire from the fund on reaching age 55. No right of withdrawal exists. The exception has been when a resident emigrates, and that emigration is recognised by the South African Reserve Bank for Exchange Control purposes.

A right of withdrawal is also permitted to temporary residents who leave South Africa when their visa expires. The law has not changed at all in relation to temporary residents who may withdraw when their visa expires, and they have left the country.

Despite some press reports to the contrary, these changes to the Taxation Laws Amendment Act have nothing to do with policy around prescribed assets and does not mean that the state will remove or confiscate assets that have been abandoned for a certain period of time to fund infrastructure.

National Treasury seeks to phase out the concept of emigration, and this is the sole reason for the change to the legislation.

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