Tax Advisers - Deloitte

South Africa
International assignments:
local vs foreign pension funds
Billy Joubert
Deloitte
Johannesburg
The mobility of staff with specialized skills is often crucial to
the multinational companies that employ them, as such skills
may only be required at a specific stage in the business cycle
rather than on an ongoing basis. One obvious example would
be the skills of individuals involved in prospecting for
resources, such as oil or precious metals.
Employees of whom mobility is required need to be looked
after and secondments abroad should be arranged so as not
to jeopardize their interests. Such employees need to be
properly funded on retirement and adequately covered by
life, disability and medical insurance.
Employees generally desire stability and, in any event, are
unwilling to be placed at a disadvantage (tax and otherwise)
when moving countries. Mobile employees will resent having to shoulder greater risk
than their non-mobile colleagues, so the retirement funding of seconded employees
must be protected as much as possible from fragmentation, currency fluctuations and
political upheaval.
Pension funds do not migrate readily across borders and it may not be possible to find
a satisfactory solution to some of the pension problems to which cross-border
employee movement gives rise. Certain countries are reluctant to grant tax
concessions for the pension contributions of highly mobile individuals because to do
so may erode their tax base. For example, South Africa may be unwilling to give a tax
deduction for the pension contributions of an individual who will be a UK resident
(and will therefore pay UK tax) when he or she ultimately receive a pension.
Both employee and employer contributions to a pension fund are generally tax
deductible for South African tax purposes (subject to some limitations) and payments
out of a pension fund are taxable (with relief provided for certain lump sum payments).
As the government is keen to encourage skilled employees to come to South Africa and
for people to retire there, proceeds from foreign pension funds are exempt from South
African tax, provided the respective contributions were paid when the recipient was
not working in South Africa. Apportionment is required in cases where some
contributions are made in respect of services rendered in South Africa and some in
respect of foreign services.
Exchange control is really only a concern for South African residents and even they
enjoy generous concessions in this respect. Temporary residents of South Africa can
repatriate funds without restriction and outbound expatriates may retain foreign
earnings and pensions offshore.
An employee leaving South Africa who has a pension fund will need advice.
Depending on the rules of the fund in question, the following options may be
available:
• continue contributing to the South African scheme;
• freeze contributions and make use of a preservation fund; or
• cash out, if this is possible, and pay the tax up front.
If the last option is selected and the fund is cashed out before retirement, the South
African tax consequences will be unfavourable. In any case, the facts must be examined
carefully and the decision will ultimately depend on the individual’s plans and
aspirations, and in particular on whether the individual intends to return to South
Africa.
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