National Treasury trashes big tax change in South Africa

The National Treasury has withdrawn its plan to scrap the tax exemption on foreign pensions for South African residents, following strong public backlash.

Tax Consulting South Africa said this abandonment follows a robust public participation process where several role players warned of the unintended consequences of scrapping the tax exemption by 1 March 2026.

The proposed amendment in the draft Taxation Laws Amendment Bill (TLAB) had intended to delete section 10(1)(gC)(ii) of the Income Tax Act, which contains the exemption.

However, during a virtual meeting of the Standing Committee on Finance on 4 November 2025, National Treasury deputy director-general Chris Axelson announced that this proposal had been withdrawn.

The decision comes as the Treasury acknowledged that it expected the strong pushback on the proposal since it was published in August 2025.

Now, it has elected to follow a more consultative process to ensure that any future recommendations are “watertight”. Tax Consulting South Africa’s team lead of cross-border taxation, John-Paul Fraser, welcomed the decision.

Currently, the law provision exempts pensions, annuities, and lump sums received by South African tax residents from foreign employment from being subject to normal tax.

In October, Fraser presented to the committee about the far-reaching, negative consequences that would result if the exemption were to be removed.

He told the committee the removal of the tax exemption, which has been in place for more than two decades, could deter wealthy foreigners and expatriates from choosing South Africa as a retirement destination.

It would also discourage return migration and deter global investors from establishing businesses in South Africa. He warned that deleting the exemption in its entirety would amount to economic retroactivity.

Many individuals who are nearing retirement have structured their financial futures around it, and repealing it now would, in effect, change the rules midstream.

“They would unexpectedly go from zero tax to full tax, potentially leaving retirees financially exposed in their later years,” he said.

National Treasury pivots

Axelson also acknowledged the impact of removing the tax exemption when addressing the committee on 4 November.

Here, he responded to these and other submissions to the committee on the draft TLAB and draft Tax Administration Laws Amendment Bill (TALAB).

Axelson explained that the draft amendment was aimed at protecting South Africa’s taxing rights and ensuring the South African Revenue Service (SARS) does not miss out on revenue.

He said the exemption was initially intended as a temporary measure, and Treasury has indicated in the past that it will be revisited. He added that the withdrawal is not an indication that a similar amendment “will not come back”.

“Although Treasury is still concerned that South Africa is giving up its taxing rights on foreign pensions and that the law creates instances of double non-taxation,” he said.

“Government will initiate a renewed consultative process with stakeholders to identify a balanced approach that both addresses the stakeholder concerns raised and aligns with government’s commitment to prevent double non-taxation.”

This process will involve balancing several considerations, such as the need for protection of South Africa’s taxing rights under double tax agreements (DTAs).

The government will also need to consider the technical nuances of retirement taxation regimes of several countries, and the role of many expats and foreign retirees’ contributions to the economy.

One of the concerns the National Treasury stated was that the blanket tax exemption could result in double non-taxation.

This could happen where, for example, neither the foreign jurisdiction nor South Africa taxes the retirement benefit at any point in time.

Maintaining the exemption could also result in South Africa forfeiting taxing rights that are granted under a DTA.

During the comment period, stakeholders warned that removing the exemption without sufficient data and analysis would likely discourage skilled expatriates and retirees from returning to South Africa.

It would also deter foreign nationals from choosing South Africa as a retirement destination and reduce investment and spending in the domestic economy.

Fraser said that by withdrawing the amendment and opting for extended consultation, Treasury signals that it is heeding those concerns and wants to fully understand a measure that could have substantial economic consequences.