Most Read Contributor in South Africa, September 2016
The application of the apportionment rules to South African
retirement fund benefits due to South African residents who
contributed to these funds while they worked abroad, is currently
not clear. The South African Revenue Service ("SARS")
holds the view that lumps sum benefits should be treated
differently from annuity payments. This view impacts on the tax
treatment of provident fund payments and the lump sum portion of
pension fund payments.
The apportionment rules as they applied to December 2011
The Income Tax Act ("the Act") contained specific
statutory source rules that applied to the apportionment of pension
fund benefits. Previously, section 9(1)(g)(ii) in principle,
provided that a portion of a pension granted to an individual would
be deemed to be from a source within South Africa, if the services
were rendered in South Africa for at least 2 years during the 10
years immediately preceding the date on which the pension first
became due. The application of this statutory rule meant that a
resident who worked outside of South Africa for more than 2 out of
the 10 years prior to his retirement would be able to
apply the apportionment rules and exempt all or a portion of
his/her pension benefit, depending on the amount of time he/she
spent working outside of South Africa.
The apportionment rules applicable from January 2012
Section 9 of the Act has been amended with effect from 1 January
2012. This also affects the source rules applicable to retirement
fund payments and consequently, the apportionment of these
In terms of section 9(2)(i) of the Act, an amount is deemed to
have been received by or accrued to a person from a source in South
Africa if that amount constitutes a pension and the services in
respect of which that amount is so received or accrues were
rendered in South Africa. However, in terms of the proviso to
section 9(2)(i), if the amount is received for services which were
rendered partly within and partly outside South Africa, the portion
of the amount to be included in the individual's taxable income
must be calculated pro rata to the time spent rendering services in
South Africa, e.g. if 4 out of any 10 years' of services were
rendered in South Africa, 40% of the pension will be sourced
The portion of the pension which is sourced outside South Africa
in terms of this provision and is received as consideration for
past employment outside South Africa will be exempt from South
African tax in terms of section 10(1)(gC) of the Act.
Concern with lump sum payments
The apportionment of retirement fund benefits have been
simplified through the amendment of the source rules and certainly
provide some clarity going forward for individuals working
The issue we have encountered with SARS is, however, that they
only apply the apportionment rules to annuity payments and not to
the lump sum component of retirement fund payments. This appears to
be because of their strict interpretation of the meaning of a
We do not agree with this view because retirement fund lump sum
benefits are specifically included in the gross income of a
taxpayer in paragraph 2(1) of the Second Schedule to the
SARS' current view of the treatment of lump sum benefits
unfairly prejudices individuals who have participated in a
provident fund. The effect of their view is that individuals
who retire from a provident fund and receive a lump sum benefit are
not able to claim a tax exemption in respect of the portion that
relates to their services rendered outside South Africa. It is
unclear, why in principle, the apportionment rules relating to lump
sum payments should be any different from those applicable to
annuity payments. This view also does not correspond with
international guidelines set out in the OECD commentary.
We understand that the issue is currently being addressed by
National Treasury and SARS and hope for clarification and
confirmation of the uniform treatment in the next set of
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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