Which retirement benefits are taxable?

Pensioners living in South Africa and receiving pensions as a result of working abroad in the past have, until now, enjoyed a full tax exemption on that income.

Now, as of March 1, the exemption in the Income Tax Act has been narrowed down to apply only to pensions paid from retirement funds that are not registered in South Africa, says the manager of tax consulting at BDO, Esther van Schalkwyk.

Van Schalkwyk says the exemption meant that South African residents did not have to pay normal income tax on any amount received under the social security system of any other country, or any lump sum, pension or annuity received from a source outside of South Africa as a result of past employment outside South Africa.

“This sometimes resulted in the unintended consequence that South African tax residents working outside South Africa could make tax-deductible retirement contributions to their local South African retirement funds for the relevant years of assessment while receiving tax-exempt pensions on retirement,” Van Schalkwyk says.

Typically, if you enjoy a tax deduction for contributions to a pension fund, you pay tax on the pension when it is paid to you, although retirement fund members also get the benefit of a tax-free lump sum, currently R500 000.

With effect from March 1, the relevant section granting the exemption was amended to exclude amounts received or accrued from local retirement funds.

The new clause now specifically excludes lump sums, pensions or annuities you receive as consideration for past employment outside of South Africa if they are paid from pension funds, pension preservation funds, provident funds, provident preservation funds or retirement annuity funds as defined in the Act.

Pensions arising from amounts you transfer from a source outside of South Africa to a South African-registered retirement fund are, however, still tax exempt.

Van Schalkwyk says a binding general ruling issued by the South African Revenue Service last month states that only the portion of a pension related to services rendered outside South Africa is exempt from income tax.

The ruling further confirms that pensions paid from local retirement funds are now excluded from the exemption, irrespective of where the services that gave rise to that pension were rendered.

Article by: Laura du Preez