They say change is as good as a holiday. Well, it seems that the new bills being proposed by the South African Revenue Services in its draft Tax Law Amendment Bill (TLAB) and draft Tax Administration Laws Amendment Bill (TALAB) may not be changes worth celebrating.
The changes include a three-year lock-in period for taxpayers wanting to use their retirement funds for emigration and harsher punishments regarding tax-related offenses.
Let’s look at the proposed changes to both these bills, and how National Treasury has responded.
Retirement Funds and Emigration – change proposed in the TLAB
If you are planning on emigrating, you may have to think again – especially if you need to access your retirement funds to make the move financially viable. Retirement funds have always been a smart investment tool for South Africans. The reason being, you can benefit from tax-deductible contributions and enjoy tax-free interest, dividends, and capital gains on investment growth.
However, these new draft bills look to add an extra hurdle for SA residents looking to emigrate and take their funds with them.
Under the current system, members of preservation funds and retirement annuity funds may withdraw from their investments if they formally emigrate from South Africa for exchange control purposes, and the South African Reserve Bank approves their emigration.
However, changes in the draft TLAB will effectively phase out the concept of emigration for exchange control purposes. This means South Africans emigrating from the country will only be able to make a withdrawal when a retirement fund member has ceased to be a tax resident and has remained so for a consecutive period of at least three years.
Why a three-year lock-in period?
Recently, there has been a significant increase of South African’s formalising their status as ‘non-resident’ from both a tax and exchange control perspective, by using the financial emigration process. Along with this, Treasury has seen many South Africans withdrawing their retirement funds from South Africa to invest in more stable economies.
What’s the point of the rule?
Treasury said that this mechanism would ensure there is a sufficient lapse of time for all emigration processes to have been completed with certainty. But it won’t affect workers whose residence status changes for reasons other than emigration.
Treasury also said that when South Africans contribute to pensions tax-free, the understanding is that tax is deferred until benefits are received upon retirement. The intention was not for the government to provide a tax incentive for funds to be used for emigration.
What is the main objective?
To modernise the capital flow oversight system in a manner that balances the benefits and risks of more mobile people, financial flows, and cross-border transactions. Treasury does, however, recognize that many people’s working lives often include a combination of periods spent in SA and abroad.
“Our attempt is to reconcile the choice to emigrate and electing to withdraw a retirement lump sum with the design principle of deferred taxation upon retirement,” said National Treasury. “This also illustrates a horizontal equity point: tax residents who decide not to emigrate have to wait to retirement for withdrawals from retirement annuity funds.”
The regulations are expected to come into effect on 1 March 2021.
Harsher Punishments – change proposed in the TALAB
The second change recently proposed outlines the removal of the element of wilful conduct regarding tax-related offences. Let’s explore what this means for taxpayers.
Under the current tax regulations, a person must commit an unlawful act ‘wilfully and without just cause’ for the taxpayer to be found guilty of an offence. But the draft TALAB proposes to change the working of these provisions by removing the term ‘wilfully’ from the legislation. This, in fact, implies that SARS will no longer have the obligation to prove intent before a taxpayer can be found guilty of one of these offences.
What effect will this have? Critics believe that these proposed amendments may lead to criminalising negligent conduct, including genuine errors. But SARS says that this is not the case; instead, its ‘strategic objective’ is to detect taxpayers and traders who do not comply and make non-compliance difficult and costly.
SARS also mentioned that these taxpayers would experience a response ‘appropriate to the nature and degree of their non-compliance’, which may include friendly reminders to more intrusive and investigative engagements that enforce compliance.
If you are considering emigrating and would like to find out more about how these proposed tax changes may or may not affect you, Dirmeik Consulting can help. So get in touch with us with any queries you may have.