BPR 355 - Accrual of Pension Payments to a Resident from a Foreign Pension Fund - Layman Version

Understanding Your Foreign Pension & South African Tax

 

(Based on SARS Binding Private Ruling 355)

• • This information explains how pension payments received from a foreign pension fund are taxed in South Africa, especially for South African residents who have worked both in South Africa and abroad. This is based on a specific ruling (Binding Private Ruling 355) issued by the South African Revenue Service (SARS).

Key Takeaway for South African Residents

• • If you are a resident of South Africa and receive pension payments from a foreign pension fund, these payments are generally taxable in South Africa. HOWEVER, there’s an important exemption for the portion of your pension earned from services you provided outside South Africa [6a, 6b].

Who Does This Apply To?

• • This ruling specifically addresses the tax consequences for a South African resident individual who receives pension payments from a foreign pension fund in respect of services rendered both in South Africa and outside South Africa.

The Scenario: A Common Example (from BPR 355)

• • Imagine an individual who:
    • Worked for a foreign company (Company A in Country X) for 15 years.
    • For the first 12 years, they worked outside South Africa (in Country X).
    • For the last 3 years (years 13-15), they were seconded to a South African company (Company B) while still employed by the foreign Company A.
    • After year 15, they became permanently employed by the South African Company B and became an ordinary resident of South Africa.
    • Both the foreign Company A and the South African Company B made pension contributions to a foreign pension fund (The Fund in Country X) on behalf of the individual. The individual themselves did not contribute, as it was a non-contributory fund.
    • The individual has now reached retirement age and wants to start receiving their pension payments from this foreign fund.
    • The core question is how these pension payments, earned from work in two different countries, are taxed in South Africa.

The South African Tax Rules Explained

 

“Gross Income” and Taxation:

• • All pension amounts that you will receive from the foreign pension fund must be included in your “gross income” in South Africa [6a]. “Gross income” is a key term in Section 1(1) of the Income Tax Act 58 of 1962.
  • This means, generally, these foreign pension payments are considered taxable income in South Africa [6a].

The Important Exemption – Section 10(1)(gC):

• • While the full pension must be included in your gross income, a specific portion of it can be exempt from normal tax under Section 10(1)(gC) of the Act [6a, 6b].
  • This exemption applies specifically to the part of your pension that relates to past employment services you rendered outside South Africa [6b].

How to Calculate the Exempt Amount (The Formula):

• • The exemption is applied proportionally [6a]. You use a formula to determine how much of your pension is exempt:
  • Exempt Amount = (Period of services rendered outside the Republic / Total period during which services were rendered) × Amount of lump sum or pension received or accrued
    • Example from the scenario: If the individual worked 12 years outside SA and 3 years in SA (total 15 years for the pension contributions), then 12/15ths (or 80%) of each pension payment would be exempt from normal tax in South Africa [3, 4, 6b, 7].

Important Conditions & Assumptions

• • This ruling is based on the assumption that the applicant is ordinarily resident in South Africa and is not deemed exclusively a resident of another country for double taxation avoidance agreement (DTAA) purposes.
  • The proposed transaction is the accrual of pension payments as they fall due, meaning when the individual elects to receive them.

Context of This Ruling

• • This is a Binding Private Ruling (BPR), specifically BPR 355.
  • It is binding only between SARS and the specific applicant to whom it was issued.
  • It is published for general information but does not constitute a “practice generally prevailing.” This means while it provides insight, it’s not a universal rule that applies to everyone without their own specific ruling.
  • The ruling is valid for five years from 22 October 2020.
  • References to sections are based on the Income Tax Act 58 of 1962, as applicable on 22 October 2020.