Question:
I have a Sanlam RA that will pay out in +5 years time. The question/s is/are as follows. Since 2001 I have not been living or working in SA (I have not officially emigrated). Since 2007 I have been working and paying taxes in China, where my Sanlam RA contributions are not tax deductible. What happens at age 55 - do I still pay tax on 1/3rd even though I have not had any tax deductions? Can I reinvest the whole amount for, say, another 5 years and then convert it to a monthly pension (the full amount, not making a cash lump sum withdrawal)? What are the tax implications then? The policy will be worth about R1m when I turn 55. Any advice is appreciated. P.S. I will not be returning to SA.
Answer:
Douglas,
This is quite a complicated legal matter and you should consult a tax expert for a definitive answer.
As a general rule, any retirement annuity contributions not deducted for tax are carried forward to the next year. If they remain unutilised, they are added to the tax-free lump sum portion when you claim your Sanlam RA benefit. In other words, only tax-deducted contributions and the income earned by your retirement annuity investment will be taxed, as per the lump sum tables and the personal income tax tables (for the annuity portion).
In your case, there is a further complication as you appear to be a non-resident. South Africa has a "residence" basis for tax but non-residents are taxed on a "source" basis. Persons who are not resident in SA are only subject to tax in SA on income which is from a SA source. The source of annuity income is the origin of the formal act which gives rise to that income. According to case law, in the case of a purchased annuity the source is the place where the contract was entered into. In your case this is likely to be SA.
This does not cover the lump sum. Annuities and lump sum benefits also fall under the Act’s "deemed source provisions". S9(1)(g) of the Income Tax Act deems any pension (including lump sums) or annuity granted to a person to be from a SA source if it is made by a) the SA government, any provincial administration or municipality or b) by any person, residing in SA or not, if the services in respect of which the payment is made were performed in the Republic for at least two years during the ten years immediately preceding the date from which the pension/annuity first became due. Only the period of service in the Republic will be taken into account in determining the portion deemed to be from a SA source.
The Receiver will likely determine where the money that you used to pay your retirement annuity contributions came from, and whether this is related to services you performed in South Africa. For example, if you are renting out your old home here, and using the proceeds to invest in an retirement annuity, the Receiver may deem this to be a South African-based service and tax the lump sum accordingly. If you are repatriating money from overseas, chances are your lump sum will not be taxed.
55 is the earliest you may retire from your retirement annuity, but this is not a compulsory retirement age. You can contribute to the retirement annuity for as long as you wish, and you can also make it paid-up and leave the funds invested in the retirement annuity until you do choose to retire.
You can opt to convert the entire amount into an annuity; the entire amount will be taxed as an annuity. You will then lose out on the tax-free lump sum portion (currently R0 to R315 000 plus contributions not allowed for tax). However, given the projected value of your retirement annuity at retirement, the annual annuity proceeds are not likely to attract very much tax.
The annuity income may be subject to a Double Tax Agreement South Africa has with your county of residence at the time.
