Query about Sars tax on annuity for SA emigrant

A Moneyweb reader asks:

I formally emigrated from SA in 1981 and have been a tax resident offshore since then (in Spain since 2007).

Until 2012 I continued to fund an Old Mutual annuity policy with already-taxed offshore income. When it matured in 2012 I elected to take a lump-sum payout and was taxed on the full amount by Sars before payment was made into my blocked rand account.

I exported the funds and purchased an annuity policy in Europe. I’m now taxed annually on that income in Spain. Is that Sars tax on the payout to a foreigner who is not tax-resident correct, given the existence of a “typical” double-taxation agreement?

Brenthurst Wealth financial director Gavin Butchart answers: From a South African point, retirement annuities (RAs) provide individuals with an option to save for retirement in their personal capacity, while provident and pension funds are offered and administered by employers to employees.

RAs are generally paid by taxpayers directly, using after-taxable income and claimed as a deduction in their annual income tax returns, which are subject to prevailing tax limits.

At retirement age you have the option to retire from the fund, commute up to one third of the fund value taxed according to the retirement tax tables, with the remainder used to purchase an annuity which is then taxed at source, according to your marginal tax rate.

When non-resident taxpayers elect to commute the full amount with regards to a RA, the withdrawal tax tables are applied.

Non-resident taxpayers are usually only subject to SA tax on their income from sources within SA. If a non-resident member elects to leave the benefit in SA and purchase an annuity at retirement then the annuity will be taxed at the member’s marginal tax rate. However the non-resident can elect to apply for a directive for relief.

The purpose of the double taxation agreements between the two countries is to enable the administrations to eliminate double taxation, and prevent tax evasion. The lump sum withdrawal was therefore taxed in SA and current annuity withdrawals are taxed in Spain.