South African tax residents are taxed in South Africa on amounts received by or accrued to them from worldwide sources and includes pension benefits, irrespective of where these amounts are paid. However, section 10(1)(gC) of the Income Tax Act exempts the following receipts and accruals:
The exemption shall only apply to retirement benefits received from a source outside South Africa. Any lump sum, pension or annuity related to services rendered within South Africa will be regarded as an amount received from a South African source. This is confirmed in Binding General Ruling 25, where SARS ruled that an amount of pension income will be regarded as sourced outside of South Africa if the originating cause is located outside South Africa. Therefore, only the portion of the pension income related to services rendered outside of South Africa will be exempt from South African tax, and consequently, an apportionment must be performed.
In Binding General Ruling 355, SARS ruled that the formula to be used to determine the amount exempt under section 10(1)(gC) are as follows:
|Exempt amount||=||Period of services rendered outside SA||x||amount of lump sum or pension accrued or received|
|The total period during which services were rendered|
It should be noted that any amounts received from local retirement funds do not qualify for the exemption, irrespective of where the services were performed
Mr. X is a South African tax resident. From 1 March 2021 he receives an amount of R 200 000 per annum from a foreign pension fund related to services rendered to a foreign employer, from 1 March 2001 until 28 February 2021. Mr. X rendered his services outside South Africa for the period 1 March 2001 until 28 February 2016 and rendered his services within South Africa for the period from 1 March 2016 until 28 February 2021.
In respect to the 2022 year of assessment, Mr X must include the following amount in his gross income:
|Exempt amount||=||15 years||x||R 200 000|
|=||R 150 000|
Mr. X must therefore include R 50 000 in his gross income in respect to the 2022 year of assessment.
In conclusion, the exemption of foreign pension amounts will only apply to amounts derived from foreign retirement funds or the amount transferred to a local retirement fund from a foreign retirement fund, provided that the amount in question take the form of a lump sum, pension or annuity and constitute consideration for past employment services rendered outside South Africa.