The South African Institute of Chartered Accountants (SAICA) has welcomed the general binding ruling issued by SARS in respect of pensions received by or accrued to a resident from a source outside South Africa stating that the ruling will now provide clarity with regard to the exemption of pension receipts where part of the services in respect of which the pension accrues was rendered outside the Republic of South Africa (RSA).

Last week Friday SARS ruled that any pension that accrues to a person in respect of services rendered outside the RSA will generally not be subject to tax in the RSA.  Where the services were rendered in both the RSA and abroad, the pension will be apportioned in the ratio of the period of foreign services to the total period of services taken into account in determining the pension.

Section 10(1)(gC)(ii) exempts from normal tax any pension received by or accrued to a resident from a source outside the RSA as consideration for past employment outside the RSA.

SAICA’s Project Director for Tax, Piet Nel avers that the ruling now settles the different opinions which were held by SARS and Taxpayers. “Taxpayers were treating pensions relating to foreign services as exempt from tax in South Africa, while SARS’s argument was that they can tax the pension if the fund was in the RSA, therefore, SARS ignored the fact that the services that lead to the ultimate pension were not rendered in the RSA,” he explains.  The term “source outside the Republic” can be interpreted to mean either the originating cause which gave rise to that pension (foreign services rendered), or the location from which the pension is received (namely, where the fund is situated).

Nel narrates that “What SAICA therefore welcomes is that the ruling will put an end to disputes between taxpayers and SARS in this regard.  This is because SARS has now (publically) made available their interpretation which accords with ours,” adding that the ruling confirms that SARS will no longer deny the exemption in respect of foreign services where part of the services was rendered outside the RSA.”

Nonetheless, Nel observes that the ruling does not address the treatment of lump sums taken on retirement or withdrawal from the fund where the underlying services were also rendered both abroad and in the RSA.  Another uncertainty relates to assessments issued by SARS recently based on SARS’s previous view that both the services and the fund had to be outside the RSA before the exemption applies.  Whilst this is not a matter that can be addressed in a ruling, one certainly hopes that SARS would treat assessments issued now on the basis of the ruling.

“Taxpayers are reminded that the taxation of pensions in respect of services rendered in countries that the RSA has a double tax treaty with may be dealt with on a different basis,” he concludes.