National Treasury has halted its plans to start taxing foreign pensions – for now.

Chris Axelson, deputy-general of tax and financial policy, announced that Treasury has withdrawn its amendment of the draft Taxation Laws Amendment Bill (TLAB), which would have deleted a section of the Income Tax Act that exempts foreign pensions from being taxed.

Since 2001, South African tax residents – South Africans and foreign residents who retire in South Africa – who had worked overseas and receive foreign pensions paid no tax on those pensions in South Africa.

Double taxation occurs when the same income is taxed by two countries, which is generally avoided through Double Tax Agreements (DTAs) between nations. However, Treasury argued the current blanket exemption was creating the opposite problem: “double non-taxation”.

Double non-taxation occurs when pension income isn’t taxed by either the foreign country or South Africa, even in DTAs where South Africa was entitled to claim residence-based tax.

Many of the comments received by the Standing Committee on Finance expressed concern that the change would discourage wealthy foreigners from retiring in South Africa, deter South African expats from returning home, and financially devastate retirees who had planned their finances around the tax-free status.

Changing the rules midstream

Some concern was also raised that repealing the exemption could lead to double taxation from countries not offering tax relief to retirees based in South Africa, such as Germany or France, in certain cases.

Axelson argued that scrapping the exemption could have led to a win-win for SA’s coffers as well as lower tax for residents than, for example, in Germany or France.

“To find a balance between the need for protection of South Africa’s taxing right under DTAs, the technical nuances of retirement taxation regimes of several countries and the role of many expats and foreign retirees’ contribution to the economy, government will initiate a renewed consultative process with stakeholders,” said Axelson.

Axelson emphasised that the withdrawal of the repeal doesn’t mean a similar amendment “will not come back”, but that Treasury will pursue a more consultative approach to find a solution.

John-Paul Fraser, team lead: cross-border taxation at Tax Consulting SA, welcomed the decision.

The exemption has been in place for more than two decades. He emphasised that deleting the exemption in its entirety would amount to economic retrospectivity. Many individuals, who are nearing retirement, have structured their financial futures around it — repealing it now would, in effect, change the rules midstream.

“They would unexpectedly go from zero tax to full tax, potentially leaving retirees financially exposed in their later years.”

Read more @news24