National Treasury has stuck to the three-year rule to determine tax non-residency for South African emigrants. This new rule will become effective on 1 March 2021.

In terms of the proposed amendment in the Draft Taxation Laws Amendment Bill, emigration will change from a bank process through the South African Reserve Bank to a tax process through the South African Revenue Service.

Kyle Mandy, a tax technical partner at PwC, says the three-year rule will dictate when emigrants are entitled to access their retirement annuities and, in certain instances, their preservation funds. Currently, in terms of the exchange control rules of the South African Reserve Bank, emigrants can access their retirement funds immediately once the emigration has been formally approved.

Several stakeholders such as PwC and industry bodies such as the South African Institute of Chartered Accountants (SAICA) and the South African Institute of Tax Professionals (SAIT) have made submissions to mitigate the impact. Many have argued that three years is too long and that there are other ways to determine whether someone has left permanently. However, National Treasury has rejected all those submissions. Although the parliamentary Standing Committee on Finance (SCoF) can still reject or amend the treasury proposal, there is no indication from the committee that it will be open for amendments, says Mandy.

However, Mandy adds that the implications may not be as far-reaching as many people are suggesting. Individuals will be able to access their occupational pension and provident funds when they resign from their current position. These funds will most likely be kept in a preservation fund in order to continue tax-deductible contributions.

Affected persons

Joon Chong, a tax partner at Webber Wentzel, says the three-year rule will affect all those who have investments in retirement annuity funds, whether pre-retirement or not. She explains that individuals may make a once in a lifetime withdrawal from their preservation fund before retirement; they may withdraw either the full amount or a portion of it. “If a person elects to withdraw 40%, they can only access the remaining 60% in the preservation fund at 55 years, or if they complete the (current) financial emigration process.”

Retirement annuities do not offer such an election. The individual can only access it when they have reached 55 years, and they can only withdraw one third as a lump sum; two thirds have to be annuitised, says Chong, who is also a member of the SAIT personal and employment taxes work committee.

If people have already made the once in a lifetime withdrawal from their preservation fund, they will be caught by the three-year rule if they apply for emigration after March next year. “A principle concern, besides the draconian nature of the rule, is that emigrants very often need access to those funds to set themselves up in the new country given how expensive it is,” says Mandy.

Foreign retirement rules

Most countries have their own specific rules when it comes to retirement funds. Australia, for example, allow the newcomer to transfer their retirement funds into their (Australian) approved retirement funds but within a limited timeframe. “So, there are other issues that need to be considered when it comes to any sort of delay in transferring the funds. It will differ from country to country, depending on their own retirement fund rules,” warns Mandy.

Some leniency

Chong says treasury has indicated that all complete applications for emigration received by the South African Reserve Bank before 1 March 2021 will be finalised through the existing process, even if the approval occurs after 1 March 2021. This leniency granted by treasury is most welcomed as many potential emigrants still face delays with obtaining appropriate permits and travel bans in the country of emigration. “International flights are still not readily available and very expensive.”

Chong advises individuals who are emigrating to submit their application forms and supporting documents (including tax clearance certificates) to their authorised dealers as soon as possible.

Read more: Questions about constitutionality of the three-year emigration rule