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What South African retirees abroad need to know about living annuities and double taxation agreements

What South African retirees abroad need to know about living annuities and double taxation agreements

June 10, 2024


Are you considering retiring under sunny skies abroad while receiving income from your South African living annuity? Sounds idyllic! But hold on, there’s a potential tax hurdle you’ll need to jump. This article explores the complexities of living annuities and double taxation for South African retirees living overseas. We’ll explain how Double Taxation Agreements (DTAs) can help and the recent changes and potential delays you might encounter when claiming your tax benefits. We’ll then guide you through steps to minimise these delays and explore alternative solutions to ensure a smoother transition for your finances.

South African retirees living abroad and living annuities:

Living annuities can provide income for South African retirees living overseas. However, if not careful, retirees may end up paying tax in two countries on their annuity income.

Double taxation agreements (DTAs) can help:

South Africa has DTAs with many countries. These agreements prevent retirees from being taxed on the same income in South Africa and their new country of residence.

How to claim DTA benefits:

There are two ways to claim DTA benefits on your living annuity income:

  1. Tax directive (RST01): This is a document obtained from the South African Revenue Service (SARS) that exempts your future living annuity income from South African tax for a set period (usually three years).
  2. Tax objection (RST02): This involves filing an objection after you’ve already paid tax to SARS. It informs them that the tax should not have been withheld because of the DTA.

Recent changes to tax on living annuity income in practice and what to be aware of:

SARS is updating its procedures for handling DTAs and living annuities for non-residents. This may cause some delays and complications in receiving tax refunds.

  • Despite the RST01 system working reasonably well, in practice, SARS has not been applying the domestic tax law, in which case the DTA overrides the individual’s RST02 objection.
  • The RST02 is usually required after tax emigration in years one and two. This is because the taxpayer cannot prove to SARS that they are no longer tax resident, nor do they yet qualify to get a tax residence certificate from the foreign tax office in time.
  • As such, their retirement fund (in the absence of a tax directive) is bound to follow the living annuity rules and tax law in South Africa, which states that SARS must be paid PAYE.
  • According to SARS, now the fund must interpret and apply the relevant DTA override if a taxpayer is a non-tax resident, even where they pay PAYE to SARS. Unless the fund recodes the individual’s IRP5 to show that the income is tax exempted, SARS will not apply the DTA, and the taxpayer will receive no refund.

Many think that SARS’s behaviour amounts to shirking its duty, passing the buck onto others to apply on their behalf. This is particularly true given that fund administrators are not tax experts or well versed in the application of South African law or DTAs.

Living annuity tax in South Africa: an unpleasant surprise for expats

What is the result? Taxpayers are having tax deducted from their living annuity income in South Africa and finding that when they report the income and tax paid to the tax office in their new country, this tax authority rightly raises the taxes due to them and denies the tax credits because South Africa does not hold the taxing rights. This then places the onus on the taxpayer to claim a refund from SARS.

As such, a non-tax resident earning an income from South African living annuities could pay double taxes, and in some cases, this can be as high as 90% between South Africa and the second country.

What is the solution to this double tax quandary?

Can something be done? As with anything bureaucratic, the objection timelines are frustrating. This is because:

  • Tax returns can only be lodged in July the earliest.
  • The objection (RST02) can only be lodged in July at, the earliest.

The objection process with SARS usually takes the whole three months. If any extra documentation is required, this can add another two months to the waiting time. This means that an answer from SARS will only take place in October if no documentation is required. Where extra documentation is needed, an answer can only be expected in January of the following year. Then, the appeal process itself would take four and a half months, which means the following April or June.

In most countries, taxes must be paid within two months of assessment, with the latest date being January of the following assessment year. This is problematic because if a taxpayer is caught in the double tax trap, then they would only have one option available—if there is a relevant DTA in place, the taxpayer must attempt to apply the Mutual Agreement Procedures through their resident tax office.

Navigating the double taxation objection process

As mentioned, the objection process for resolving tax in two countries with SARS can be lengthy and bureaucratic. Here are some steps you can take to minimise delays:

  • Act early: File your tax return as soon as possible in July to give yourself the most time for the objection process if needed.
  • Gather documents upfront: Anticipate any document requests from SARS and have them readily available to avoid extensions.
  • Consider professional help: A tax practitioner experienced with South African DTAs and living annuities for non-residents can be invaluable. They can help navigate the process efficiently and ensure you have the necessary documentation to minimise back-and-forth with SARS.

Remember, the three-year window for initiating Mutual Agreement Procedures provides some flexibility. Being proactive and well-prepared can increase your chances of a smoother resolution.

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Feeling overwhelmed by the financial complexities of expat life?

Managing retirement income, taxes, and currency exchange as a South African expat can be challenging.

This is where FinGlobal’s expert guidance comes in.

Our team of cross-border experts specialise in handling:

  • Retirement annuity withdrawals
  • Pension income transfers
  • Tax clearance
  • Tax Refunds
  • Tax emigration
  • Foreign exchange and exchange control

With the right support, you can focus on enjoying your new life abroad with peace of mind. Contact FinGlobal today!

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