[FAQ] The South African tax implications of foreign pension received

[FAQ] The South African tax implications of foreign pension received

• 06 April 2021
• Individuals Tax
• Piet Nel

This article is based on tax law for the year ending 28 February 2021.

Background

A non-resident (USA resident) has been living with his life partner, who is in South Africa, for the last 18 months. He is retired and wants to settle in South Africa and hopes to get permanent residency. He earns pension from the USA of R100 000 per month and gives R50 000 a month to his South African life partner. The South African life partner is not earning any income as she is not working. The non-resident earns no South African source income.

• Does the non-resident need to register for tax in South Africa? If so, will he only reflect his pension fund which is exempt?
• Is the R50 000 a month that he gives to his life partner a donation?

Answer

We accept, based on the fact provided by you, that the individual is someone who is exclusively deemed to be a resident of the USA. The matter is dealt with in Article 18 of the RSA / USA treaty. I copied the relevant parts below.

Article 18(1)

“Subject to the provisions of Article 19 (Government Service), pension distributions and other similar remuneration derived from sources within a Contracting State (in your case this is the USA) and beneficially owned by a resident of the other Contracting State (the RSA then, but possibly not applicable on the assumption made above), whether paid periodically or as a single sum, may be taxed by the first-mentioned State (the USA) under the following conditions:

a) where the United States is the first-mentioned Contracting State, the tax imposed on the pension or similar remuneration may not exceed 15 percent of the gross amount of the pension or similar remuneration, provided that such pension or similar remuneration is not subject to a penalty for early withdrawal; and

b) where South Africa is the first-mentioned Contracting State:

i) the beneficial owner of the pension or similar remuneration has been employed in South Africa for a period or periods aggregating two years or more during the ten year period immediately preceding the date from which the pension first became due; and

ii) the beneficial owner of the pension or similar remuneration was employed in South Africa for a period or periods aggregating ten years or more.”

Article 17(7)

“For the purposes of this Convention, a pension or similar remuneration is deemed to arise from sources within a Contracting State to the extent that the pensionable service to which it relates is performed in that State.”

You will have to determine if the pension is “beneficially owned by” your client. In terms of article 18(3) of the treaty, “annuities beneficially derived by a resident of a Contracting State (USA) shall be taxable only in that State unless the annuity was purchased in the other Contracting State (RSA) while such person was a resident of that other State, in which case the annuity may also be taxed in that other State.”

The term "annuities" as used in the abovementioned paragraph means “a stated sum paid periodically at stated times during life or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

If the RSA has a taxing right, the section 10(1)(gC) exemption would apply (we accept the fund is not an approved by SARS one). A rebate, under section 6quat, will be available in respect of foreign tax.

He would have to register as a taxpayer if he derives RSA sourced income or is obliged to submit a return. It depends on the above.

Under section 56(1)(b) of the Income Tax Act, donations tax is payable in respect of the value of any property which is disposed of under a donation to or for the benefit of the spouse of the donor who is not separated from him under a judicial order or notarial deed of separation. However, donation tax is only payable if there was a donation – gratuitous disposal.

In this regard the comment by Judge Zulman, in Welch v CSARS, is relevant. The judge said that “one is taxed only if one gratuitously disposes of money or assets in the sense of either the common law or the definition of donation in the Act.” It is important to determine if they are spouses, see the definition of section of spouse in section 1(1) of the Act.

Webinar Commentary

Further webinar commentary on Donations Tax Series can be accessed here.

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