A misunderstanding of certain sections in the Income Tax Act has many South Africans who moved abroad and ceased tax residency, worried that they will also be liable to pay Capital Gains Tax (CGT) on the withdrawal of their retirement funds, in addition to the tax levied as per SARS’ Tax Tables. 

The good news is that recent amendments to Section 9H of the Act which governs the exit tax - a mechanism in South Africa’s tax system to ensure that individuals who cease to be tax residents settle their tax obligations before leaving the country - brings clarity on how retirement funds are treated upon cessation of residency.

The amendments provide relief by confirming that retirement fund interests are not subject to CGT on exit, avoiding potential double taxation for the non-resident taxpayer.

What is an Exit Tax?

Section 9H of the Income Tax Act imposes a tax upon cessation of tax residency in South Africa. The provision deems the individual to have disposed of their assets (with some exceptions) on the day before they cease residency, triggering a CGT liability.

In simpler terms, the exit tax ensures that South Africa does not forfeit its right to tax a person’s assets simply because they have changed their tax residency. Since this tax is levied as a final charge before a person exits the South African tax net, both National Treasury and the South African Revenue Service (SARS) commonly refers to it as the “exit tax” or “exit charge”.

Understanding Paragraph 9HC: Tax Implications on Retirement Interests for Exiting South African Tax Residents

Paragraph 9HC of the Second Schedule to the Income Tax Act, which came into effect on 1 March 2021, imposes a tax on retirement interests when a person ceases to be a South African tax resident. This provision mirrors the mechanics of the existing Section 9H exit tax by treating a taxpayer as having disposed of their interest in a retirement fund on the day before they cease residency. However, access to these retirement savings is only permitted once the individual has maintained non-tax resident status for at least three consecutive years.

While there may be debate over terminology, the fact remains that this tax is triggered by an individual’s departure from South Africa, making it an exit tax in substance, if not in name.

Amendments to Section 9H: Retirement Fund Interests Excluded from Exit Tax

The recent amendments specify that retirement interests should not be subject to CGT on exit because doing so could lead to double taxation. This is because:

• The member would later pay tax on the same funds when withdrawing, retiring, or upon death.
• Lump sums from retirement funds are already taxed under the Lump Sum Tax Tables in the Rates and Monetary Amounts Acts.
• Section 9(2)(i) of the Income Tax Act deems these amounts to be from a South African source, meaning they remain within South Africa’s taxing jurisdiction even if the individual is no longer a resident.

To resolve this, a new paragraph (g) of Section 9H(4) has been introduced, explicitly excluding retirement interests from the exit tax. This ensures that South Africa retains its taxing rights without imposing an upfront CGT liability when a person emigrates.

Consider the 3-year lock-in rule 

Although the amendments clarify that exit tax will not be levied on retirement interests, South Africans who have ceased tax residency and still have retirement funding in South Africa, must take note of the impact the 3-year lock-in rule will have on them accessing their funds. 

The rule applies to early lump sum retirement withdrawals by South Africans who have ceased tax residency and states that expatriates must maintain this status for at least three consecutive years before they can access and withdraw their full retirement (RA) and preservation funds.

From a specialist tax and financial planning perspective, there is much to gain in getting expert tax advice in this regard. Our experience in the market is that a well planned and executed withdrawal strategy makes a big difference.

Conclusion

The concept of an exit tax is well-established in South African tax law and is aimed at preventing loss of tax revenue when individuals change their tax residency. The introduction of Section 9HC extends this principle to retirement interests, but amendments ensure relief by confirming that retirement fund interests are not subject to CGT on exit, avoiding potential double taxation. These developments highlight the government’s effort to balance tax revenue protection with fairness for taxpayers leaving South Africa.

As tax laws evolve, individuals considering emigration should seek specialist tax advice to understand their obligations and potential tax liabilities before exiting South Africa’s tax system.

Written by Mbalenhle Mahlaba (BCom Law & LLB), Expatriate Tax Specialist at Tax Consulting SA