Current Tax Treatment of Cross-Border Retirement Funds
Effective from 1 March 2017, section 10(1)(gC)(ii) of the Income Tax Act, No. 58 of 1962 (“the Act”), subject to certain requirements, exempts from normal tax any lump sum, pension or annuity received by or accrued to any South African tax resident from a source outside South Africa as consideration for foreign services rendered in terms of past employment.
As South African tax residents are generally required to declare and pay taxes on their worldwide income, section 10(1)(gC)(ii) of the Act was designed to prevent double taxation on retirement funds already taxed in a foreign country or earned while an individual was not subject to South African tax.
Reasons For Change
In terms of the Explanatory Memorandum to the Taxation Laws Amendment Bill, 2025, issued by National Treasury on 16 August 2025, the call for reform stems from the following –
- “In the 2013 Budget Review, it was noted that: South African residents working abroad and foreign residents working in South Africa regularly contribute to local and foreign pension funds, giving rise to a variety of tax issues. While certain limited rules have long been in place, these rules are largely ad hoc. With overall retirement reform now in effect, cross-border pension issues need to be fully reconsidered.“
- “… [T]he 2022 Budget Review stated that: A review of the exemption of foreign retirement benefits in domestic tax legislation will be conducted.”
- “In the 2024 Budget Review, the Government acknowledged the need to enhance the rules that currently exempt lump sums, pensions, and annuities received by South African residents from foreign retirement funds for past employment outside South Africa, so that these amounts are taxed fairly and consistently.”
The discourse around the retirement tax regime in South Africa, since 2013 to date, is evidence enough that the tax treatment of retirement funds has been a long-standing item by National Treasury and SARS.
Issues With the Current Exemption Rules
The two main issues identified with section 10(1)(gC)(ii) of the Act, as a blanket exemption, are listed as follows:
“Issue 1
Firstly, the exemption may result in double non-taxation, particularly where the foreign jurisdiction does not tax the retirement income due to domestic law or tax treaty limitations. In these cases, neither South Africa nor the foreign jurisdiction imposes tax on the retirement benefit. This undermines South Africa’s residence-based system of taxation and leads to revenue forgone to the fiscus.”
“Issue 2
Secondly, in instances where a DTA grants South Africa the exclusive right to tax such retirement benefits based on residence, South Africa forfeits this right by maintaining the exemption in section 10(1)(gC)(ii) of the Act. As a result, the foreign jurisdiction, despite lacking primary taxing rights under the treaty, may choose to tax the retirement benefits because South Africa does not tax them. This misalignment allows the foreign jurisdiction to benefit from taxing rights that South Africa does not exercise. The South African fiscus ultimately forgoes revenue that it is entitled to collect.”
The Proposal
In the Explanatory Memorandum to the Taxation Laws Amendment Bill, 2025, National Treasury has proposed that section 10(1)(gC)(ii) of the Act be deleted in its entirety. This is to ensure foreign retirement funds received by South African tax residents are appropriately taxed in line with South Africa’s residence-based system of taxation.
The deadline to submit comments on the proposed amendments is 12 September 2025. These must be sent to –
Conclusion
As retirement planning is a key principle of personal financial planning, South African expatriates and foreigners relocating to South Africa, should consult qualified tax professionals experienced in cross-border taxation.
With the legislative cycle progressing, it will also be a make-or-break for taxpayers to stay up to date on any changes that will affect their foreign retirement income and plan accordingly on a more urgent basis than they may have liked.
