Withdrawing retirement funds upon emigration

Background

Financial emigration is the process by which South African residents formalise their non-resident status for exchange control purposes. During the 2020 Budget Speech, it was announced that financial emigration would be phased out with effect from 1 March 2021.

The phasing out of financial emigration is not just important for exchange control purposes but may also be relevant in the tax environment.  Previously, the Income Tax Act allowed an individual taxpayer to withdraw their interest from the retirement fund prior to retirement upon emigration, where such emigration is recognised by the South African Reserve Bank (financial emigration). Due to the fact that the concept of emigration will be phased out by the South African Reserve Bank, a new test is required for the individuals to withdraw from their retirement funds when exiting South Africa.

New legislation

In terms of the Taxation Laws Amendment Act No. 23 of 2020, a new test is inserted into the Income Tax Act to replace the previous test which made reference to financial emigration. The new test states that withdrawal from retirement funds will only be allowed if that person can prove that he or she ceased to be a tax resident and has remained a tax non-resident for an uninterrupted period of 3 years or longer, on or after 1 March 2021.

The individual’s tax residency should be determined in accordance with the provisions of the Income Tax Act, which provides for two tests, namely the ordinarily resident test and the physical presence test. An individual shall be regarded as a tax non-resident if they do not comply with the requirements of either test. An individual may also be regarded as a tax non-resident by virtue of the provisions of an applicable double tax agreement between South African and another jurisdiction.

Process to withdraw from retirement funds

Individuals who financially emigrated before 1 March 2021 and had their MP336(b) application forms attested by an authorised dealer before this date, will still be able to apply for a tax compliance status in respect of emigration, during the period ending 28 February 2022, as a transitional arrangement. Withdrawals from retirement funds for these persons will still occur in terms of the current procedure dealing with emigration for exchange control purposes.

Individuals who ceased to be a tax resident can access their retirement funds if they can prove to the fund that they have been a tax non-resident for an uninterrupted period of 3 years on or after 1 March 2021 and an applicable tax directive is issued to the fund by SARS. Taxpayers must still apply for a tax compliance status via the emigration application. In order to transfer the retirement funds abroad, individuals must provide to the authorised dealer the tax compliance status, as well as documentation from the fund that indicates the final amount paid to the individual before any transfer can be affected.

With the phasing out of financial emigration and the new focus being on tax residency, it is more important than ever to regularise your affairs with SARS when exiting South Africa.