Good news for South Africans retiring overseas

Recent legal amendments clarify that South Africans who have moved abroad will not have to pay capital gains tax (CGT) upon withdrawing their retirement.

However, Tax Consulting South Africa’s expatriate tax specialist, Mbalenhle Mahlaba, warned that expatriates must maintain non-tax resident status for three years before accessing their funds.

Mahlaba explained that a misunderstanding of certain sections in the Income Tax Act has caused many South Africans who moved abroad and ceased tax residency to worry that they will also be liable to pay CGT once they withdraw their retirement funds.

This CGT would be added to the tax levied as per SARS’ Tax Tables, meaning that South Africans would be subject to double taxation.

Mahlaba explained that the good news is that Section 9H of the Act, which governs the exit tax and ensures that individuals who cease to be tax residents settle their tax obligations before leaving the country, has recently been amended.

This amendment clarifies how retirement funds are treated upon cessation of residency.

“The amendments provide relief by confirming that retirement fund interests are not subject to CGT on exit, avoiding potential double taxation for the non-resident taxpayer,” Mahlaba said.

She explained that Section 9H of the Income Tax Act imposes a tax upon cessation of tax residency in South Africa.

“The provision deems the individual to have disposed of their assets, with some exceptions, on the day before they cease residency, triggering a CGT liability,” she said.

“In simpler terms, the exit tax ensures that South Africa does not forfeit its right to tax a person’s assets simply because they have changed their tax residency.”

“Since this tax is levied as a final charge before a person exits the South African tax net, both National Treasury and the SARS commonly refer to it as the ‘exit tax’ or ‘exit charge’.”

Legal changes

Mahlaba added that Paragraph 9HC of the Second Schedule to the Income Tax Act, which came into effect on 1 March 2021, imposes a tax on retirement interests when a person ceases to be a South African tax resident.

“This provision mirrors the mechanics of the existing Section 9H exit tax by treating a taxpayer as having disposed of their interest in a retirement fund on the day before they cease residency.”

“However, access to these retirement savings is only permitted once the individual has maintained non-tax resident status for at least three consecutive years.”

“While there may be debate over terminology, the fact remains that this tax is triggered by an individual’s departure from South Africa, making it an exit tax in substance, if not in name.”

The recent amendments to Section 9H specify that retirement interests should not be subject to CGT on exit because doing so could lead to double taxation.

This is for several reasons, including the fact that the member would later pay tax on the same funds when withdrawing, retiring, or upon death.

Lump sums from retirement funds are also already taxed under the Lump Sum Tax Tables in the Rates and Monetary Amounts Act.

Additionally, Section 9(2)(i) of the Income Tax Act deems these amounts to be from a South African source, meaning they remain within South Africa’s taxing jurisdiction even if the individual is no longer a resident.

“To resolve this, a new paragraph (g) of Section 9H(4) has been introduced, explicitly excluding retirement interests from the exit tax.”

“This ensures that South Africa retains its taxing rights without imposing an upfront CGT liability when a person emigrates.”

Taxes on retirement funds

The amendments clarify that exit tax will not be levied on retirement interests.

However, Mahlaba said that South Africans who have ceased tax residency and still have retirement funding in South Africa must consider the impact of the 3-year lock-in rule on accessing their funds.

“The rule applies to early lump sum retirement withdrawals by South Africans who have ceased tax residency and states that expatriates must maintain this status for at least three consecutive years before they can access and withdraw their full retirement and preservation funds.”

“From a specialist tax and financial planning perspective, there is much to gain in getting expert tax advice in this regard. Our experience in the market is that a well-planned and executed withdrawal strategy makes a big difference.”

Mahlaba added that the concept of an exit tax is well-established in South African tax law and aims to prevent the loss of tax revenue when individuals change their tax residency.

“The introduction of Section 9HC extends this principle to retirement interests, but amendments ensure relief by confirming that retirement fund interests are not subject to CGT on exit, avoiding potential double taxation.”

“These developments highlight the government’s effort to balance tax revenue protection with fairness for taxpayers leaving South Africa.”

“As tax laws evolve, individuals considering emigration should seek specialist tax advice to understand their obligations and potential tax liabilities before exiting South Africa’s tax system.”