The new amendments to the Income Tax Act under the two-pot retirement system, announced by the National Treasury on August 1, 2024, have introduced additional considerations for South Africans living abroad.
Tax Consulting SA advises expatriates to be aware of these changes, as they may affect their access to retirement funds.
Background
Currently, South African expatriates whose tax non-residency status has been confirmed by the South African Revenue Services (Sars) for an uninterrupted period of three years can withdraw their full retirement savings, in accordance with the three-year lock-in rule.
According to Tax Consulting SA, the three-year lock-in rule operates independently of the general exceptions that allow for early access to retirement funds, for instance, ceasing employment.
Under the new two-pot retirement system that will be implemented on September 1, 2024, retirement savings are divided, into three (and not two) "pots":
– The vested pot will hold all of the retirement savings accumulated up until 31 August 2024;
– The savings pot will have of one-third of retirement contributions, post 1 September 2024
– The retirement pot consists of two-thirds of retirement contributions, post 1 September 2024.
Each pot is regulated by its own set of rules that must be clearly understood by expatriates.
Key amendments impacting expats
Tax Consulting SA noted that a significant change in the proposed amendments is the clarification of how the three-year lock-in rule operates regarding the withdrawal of retirement funds by expatriates.
Vested Component
The vested component, consisting of funds accumulated by South African expats up until August 31, 2024, remains regulated by the current retirement rules and will continue under existing fund rules. However, the proposed amendment clarifies that the three-year lock-in rule will not apply to the vested pot of pension and provident funds.
Retirement component
Tax Consulting said that although this is a new introduction to the retirement regime under the two-pot system, the retirement component will also be subject to Sars non-residency requirements.
“Expatriates are therefore required to comply with the three-year lock-in rule, prior to being eligible to make an early withdrawal of the funds in the retirement pot,” Tax Consulting SA said.
Savings component
Expatriates are allowed to make one withdrawal from their savings pot per tax year. A tax year runs from March 1 to February 28/29.
It is important to note that expats are allowed to make a withdrawal from each separate retirement policy held by them.
For example, if an expat has two policies, a withdrawal from each of the respective policies will be permitted in a tax year.
According to Tax Consulting SA, these funds are not subject to the three-year lock-in period.
Adapting to the new landscape
Tax Consulting SA said that the last-minute amendments makes it necessary to reassess financial plans to ensure that they align with the new rules, particularly the operation of the three-year lock-in period.
With the implementation date approaching, staying informed about any further clarifications or updates from Treasury is crucial for expats to adjust their plans accordingly. Given the complexity of the new rules, expats should consider seeking advice from tax practitioners and financial advisors.
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