Tax shock for pensioners
RELIEF WITHDRAWN: FOREIGN EARNINGS SQUEEZED IN LAW CHANGE
Current retirees who contributed to local pension funds while working overseas are facing an earnings shock thanks to tax law changes that operate retrospectively.
ABusiness reader was recently informed the tax relief he enjoys on a portion of his pension, due to work abroad, will be revoked following a change to tax legislation.
“I am a pensioner of 20 years and have enjoyed tax relief on almost 50% of my pension following service outside South Africa. With just 30 days notice, I was advised that this tax relief would be discontinued from March 1, 2017 due to new government legislation,” he says.
'Grossly unfair'
“I think it is grossly unfair to do this to existing pensioners who have no opportunity to compensate for the loss of income.
“Currently employed people who were looking forward to such relief are in a position to work a little longer or make other plans, but existing pensioners just have to suffer a massive reduction in monthly income.”
Retired South African tax residents who worked abroad for a part of their careers (but continued to contribute to a South African retirement fund) will likely share his sentiment.
Changes to the foreign service exemption on retirement benefits from a South African retirement fund could beggar their pensions substantially with higher taxes.
The issue has significance for existing retirees who based their living-annuity drawdown decisions on cash-flow projections that included the tax relief. The change applies retrospectively.
Jaco la Grange, an associate director in the Global Employer Services division of Deloitte Tax, explains a recent legislative amendment only exempts the portion of the pension received for foreign services where the retirement fund is a foreign fund.
Previously the exemption also applied to local retirement funds.
Beatrice Gouws, associate director for Global Mobility Services and Employment Tax Advisory at KPMG, says the amendment affects South African tax residents who have spent a part of their careers working abroad, but who continued to contribute to the South African retirement funds of their employers.
Prior to March 1, 2017, these individuals only paid tax in South Africa on the portion of their re- tirement income related to service in South Africa, she adds.
Gouws says she is aware of individuals who have worked abroad for 20 years, while contributing to the South African-based retirement fund of their employers. They would now like to retire in South Africa but because they will become South African tax residents when they do, they effectively can’t.
While non-South African tax residents, the legislative change won’t have any impact.
Criticism rejected
National Treasury, in its final response document on the amendment Bills, rejected criticism that the legislative change would lead to financial hardship.
“This amendment will ensure we maintain the principle of horizontal equity, taxpayers in the same situation with similar levels of income should be treated and taxed in the same way,” it said.