BPR 119 was issued by SARS on 31 August 2012 and deals withthe tax consequences arising from a transfer of a pension fund interest from a source outside the Republic to a South African retirement annuity fund.
The proposed transaction
The Applicant is a resident of South Africa but was previously resident and employed in the United Kingdom (UK) for a period in excess of twenty years. Whilst living and working in the UK the Applicantcontributedtowards the UK fundwhich is a fund similar to a South African retirement annuity fund and it was notlinked to his employer or employment.
The Applicant intends transferring his pension interest in the UK fund to the SA fund by means of Her Majesty’s Revenue and Customs (HMRC) Qualifying Recognised Overseas Pension Scheme (QROPS) transfer system as this can have significant taxation and investment advantages to individuals with UK pension rights who have or will become non- resident in the UK for tax purposes.
Under the QROPS transfer system a person may transfer their UK pension interest free from UK tax to an overseas fund that has been approved by the HMRC as a QROPS. The rules of the approved Scheme to which pension funds will be transferred should correspond to the rules governing an authorised UK pension scheme.
To further qualify for a pension transfer into an approved Scheme the following QROPS rules will apply with regard to the transferee who must either –
be a current member of a personal or occupational pension fund;
have been or expect to become a non-UK resident for a minimum
of 5 years; or
have not yet purchased an annuity.
The SA fund is an approved fund for purposes of the HMRC QROPS transfer system.
On transfer of the Applicant’s pension interest from the UK fund to the SA Fund:
There will be no amount to be included in the Applicant’s gross income in terms of the general definition of "gross income” in section 1 as the accrual will be of a capital nature. There will also be no inclusion in terms of paragraph (e) of the definition of "gross income” because the UK fund does not qualify as a "pension fund” as defined in section 1.
The amount transferred to the SAfund will qualify for deduction under section 11(n)(i) to the extent provided for by subparagraph (i)(aa) read with paragraph (cc) of the proviso.
The benefits to be received by the Applicant from the SA fund will be from a South African source, consequently, section 9(1)(g) will not be applicable.
The annuity that will be received by the Applicant will be included in his gross income under paragraph (a) of the definition of "gross income” and will not be exempt under section 10(1)(gC).
The lump sum benefit will be taxable under paragraph 2(1)(a) read with paragraph 5(1)(a) of the Second Schedule. The amount so determined will be included in the gross income of the Applicant under paragraph (e) of the definition of "gross income”.
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