A previous limitation to criteria which enabled South Africans working abroad to make early withdrawals from their retirement annuity funds has had unintended policy consequences.

This has prompted proposed measures in the Draft Taxation Laws Amendment Bill whereby individuals will have to formally emigrate to be able to make early lump sum withdrawals from their retirement funds, making it a more costly and cumbersome process.

National Treasury says it has come to government’s attention that scrapping the requirement that an individual must formally emigrate from South Africa, and that the emigration must be recognised by the South African Reserve Bank (Sarb) for purposes of exchange control has enabled South Africans to make an early withdrawal from their retirement annuity funds without formally emigrating.

“This was not the original policy intention,” Treasury said in the explanatory memorandum.

Most retirement reforms initiated by government in recent years have been aimed at ensuring that South Africans preserve their retirement savings for when they retire, allowing early withdrawals only in specific circumstances.

The criteria for allowing a lump sum withdrawal were changed last year, stating that the withdrawals (for exchange control purposes) could be done when the individual ceases to be a tax resident, or when the individual leaves South Africa when his work permit expires.

Heidi Vorster, senior legal specialist at Discovery Holdings, says the Amendment Bill seeks to rectify the previous error. Treasury is now proposing that the definition of a retirement annuity fund in the Income Tax Act be amended to include the emigration requirement (for South Africans) in order for members to withdraw from the retirement annuity fund.

“In addition, a member of a retirement annuity who leaves South Africa at the expiry of a work visa and who is not regarded as a resident by the Reserve Bank, will be allowed to take a full withdrawal from the fund,” she says.

Vorster explains that South Africans who work outside South Africa for a certain number of years cease to be tax residents without emigrating. Since they were no longer considered tax residents they were allowed to withdraw from the retirement fund.

“This option to withdraw from retirement annuities is supposed to be used by non-residents (expatriates) who work in South Africa for a period, contribute to a retirement fund and leave never to come back, but could not emigrate,” she says.

It is also available to South Africans who formally emigrate. Vorster says the limitation introduced last year was worded “a bit too wide” and created an unintended consequence.

Going forward, South African taxpayers who wish to make a withdrawal from their retirement fund must formally emigrate, and it (formal emigration) must be recognised by the Reserve Bank before they will be able to withdraw a lump sum.

The proposed amendments are deemed to have come into effect on March 1 2016.

Hugo van Zyl, member of the South African Institute of Tax Professionals, says tax emigration alone is no longer sufficient for early withdrawals. Formal emigration is now firmly back on the cards.

He says formal emigration for the sake of retirement annuity and inheritance transfers must be carefully considered before implementation.

“Formal emigration has a role to play. It is often required to overcome loop structure issues, and it is important where the client has huge amounts invested in the fund,” says Van Zyl.

If the act simply provided for South Africans not to be a taxpayer once they have left the country for a certain period, many people will be able to disinvest their retirement annuities without going through the formal (and costly) emigration process.

That has not been the policy intention.

Information provided by www.moneyweb.co.za