Tax basis of South Africa

The taxation system in South Africa is based on residency. SA tax residents, as defined in the Income tax Act, are generally subject to SA tax on their worldwide income. Non-residents are usually only subject to SA tax on their income from sources within South Africa.

Double Taxation Agreements

A Double Taxation Agreement (DTA) is an agreement entered into between two countries to provide relief from double taxation and to prevent tax evasion by providing for the exchange of information between the countries which have entered into such agreement. A  DTA overrides the provisions of the South African Income Tax Act.

Non-residents receiving a pension or annuity from a South African source should determine whether a DTA exists between South Africa and the country in which they are resident and whether relief for taxation on pensions and annuities is provided for in the DTA.

To illustrate the relief available, the following example looks at an emigrant from South Africa who is now a tax resident of Australia and receives a pension from a South African source.

DTA between Australia and South Africa

Article 18

 

Pensions and Annuities

  1.  Subject to the provisions of paragraph 2 of Article 19, pensions and annuities from sources in one Contracting State (SA) shall be exempt from tax in the first mentioned Contracting State (SA) to the extent that such pensions and annuities are included in taxable income in the other State (Aus).
  2.  Notwithstanding the provisions of paragraph 1, an annuity paid to an individual who is a former resident of a Contracting State (SA) which has been purchased by that individual by way of a lump sum cash consideration from an insurer in the course of that insurer’s insurance business carried on in that State (SA), may be taxed in that State (SA).
  3. The term “annuity” means a stated sum payable periodically at stated times during the life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.

 

Article 19

 

Government Service

Paragraph 2 of article 19

  1.  Any pension paid by, or out of funds created by, a Contracting State (SA) or a political subdivision or a local authority of that State (SA), to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in that State (SA);
  2.  However, that pension shall be taxable only in the other Contracting State (Aus) if the individual:
  1. is a resident of, and a citizen or national of that State (Aus); and
  2. the services in respect of which the pension is paid were rendered in that State (Aus).”

 

In terms of the above DTA, if an Australian tax resident receives a pension from a South African source, other than a pension in respect of government service, and the pension is included in Australian taxable income, the pension shall be exempt from taxation in South Africa.

Claiming relief

To formalise claiming relief in terms of a DTA in respect of pensions and annuities, the South African Revenue Service (SARS) has issued a form known as the “Application by Non-Resident for a Directive for relief from South African Tax for Pension and Annuities in terms of a Double Taxation Agreement” (form RST01).

The non-resident is required to complete the form, furnishing their personal details, the pension fund details and the annuity details (if applicable). Certification by Country of tax residence section of the form should be completed and stamped by the Australian Tax Office. The original form should be submitted to SARS in order to have the directive issued directly to the fund administrator.

The form RST01 should be completed for each tax year thereafter as SARS only issues directives covering the period of one tax year.

On receipt of the directive, the fund administrator would then have the authority to code the pension income as exempt from South African Taxation on the IRP5 certificate and the income should be correctly assessed when the tax return is submitted to SARS.

In cases where the non-resident has had tax deducted from his pension, which should be have been exempt in terms of a DTA, and wishes to claim a refund of the taxes, a “Request by Non-resident for a Refund from South African Tax for Pension and Annuities in terms of a Double Tax Agreement” (form RST02) should be completed and submitted to SARS.

Practical problems in claiming the exemption

As a pension falls into the definition of remuneration, in terms of Part II of the Fourth Schedule to the Income Tax Act, the Pension Fund, or other entity paying the annuity, deducts tax in the form of PAYE from the monthly payments.

In cases where a directive has not been obtained from the Commissioner, the fund administrators will treat the pension income as taxable and will withhold employee’s tax accordingly and the IRP5 certificate will be issued reflecting the pension as taxable income. Should the non-resident not succeed in having the fund administrators amend the tax certificate to reflect the income as exempt in terms of the aforementioned Double Taxation Agreement, the non-resident will be incorrectly assessed based on the IRP5/IT3(a) certificate. An objection would need to be lodged to remedy the error.

For the non-resident to be correctly assessed, it is therefore important to apply for the relief early in a tax year so that the directive is issued in time for the fund administrators to issue the IRP5/IT3(a) certificates with the correct information and codes.

Karen Paul

Accountant, Durban