Tax on the Receipt of a Foreign Pension

Tax on the Receipt of a Foreign Pension

The South African Revenue Services (SARS) initially argued that a pension fund or annuity’s physical location determined how tax is applied. If the fund is located within the borders of South Africa, that source resides locally. Therefore, the total amount is taxable in South Africa, irrespective that the pension may relate partly to services rendered abroad.

Section 10(1)(gC)(ii) of the Income Tax Act, No 58 of 1962 (hereafter referred to as “the Act”), however, constitutes an exemption for foreign pensions and transfers.

The relevant section exempts from regular tax any lump sum, pension, or annuity received by or accrued to any resident (for South African tax purposes) from a source outside the Republic as consideration for past employment abroad.

Where there are instances where services are rendered in a few countries, the amounts must be apportioned. This means that the income needs to comply with the specific tax laws for each geographical area.

The portion of the pension that would be exempt is determined by the ratio of the foreign service period over the total service period applied to the pension amount and illustrated as follows:

The term “past employment outside the Republic” refers to foreign services. Only the amount related to foreign services is exempt from income tax; however, the amount related to employment services in South Africa will not be exempt.

If you receive a lump sum, annuity or pension from a local insurer or retirement fund within South Africa, you will not qualify for the exemption. An exception applies when a source outside South Africa transfers an amount to that local insurer or retirement fund.

In conclusion, taxpayers that have worked abroad for part of their life, while still accumulating pension benefits in South Africa would still be able to qualify for the exemption under section 10(1)(gC)(ii). If this were not the case, the application of this exemption would have had a significant impact on the cash available to those people after retirement.

As the financial retirement sector is very volatile in South Africa, clients are strongly encouraged to seek professional advice before making big decisions regarding retirement annuities and pensions.

You can contact us on 021 840 1600 or tax@asl.co.za if you have any lump sum, pension, or annuity accrued to you from a source outside South Africa, and you are unsure whether the exemption applies to you or not.