Pensions received by SA residents from SA pension funds for services rendered partly abroad
21 November 2014
Posted by: Author: Jenny Klein
Author: Jenny Klein (ENSafrica)
Africans spend significant periods of time working outside the country. Due to
the fact that South Africa taxes the world-wide income of its residents,
payments received by residents for services rendered outside the
country are included in their gross income for South African tax
purposes, but may subsequently be excluded from their taxable income in
terms of any available exemptions. While this may be the case the question is
often posed whether any similar exemption may apply to their pension benefits
received upon retirement from their South African pension fund in relation to
the period of services rendered abroad.
There is a
specific exemption contained in section 10(1)(gC) of the Income Tax Act, 1962
("the Act”) which applies, inter alia, to any pension received
by or accrued to any resident from a source outside South Africa as
consideration for past employment outside the country.
statutory source rules are set out in section 9 of the Act. If section 9
of the Act does not apply, then the common law source principles as set out in
case law should be applied. In terms of our common law, the source of
income from services rendered is regarded as being located where those services
In the case
of a pension or annuity, section 9(2)(i) of the Act provides that an amount is
received by/ accrued to a person, from a source within South Africa if services
in respect of that amount is so received or accrues were rendered within South
Africa. This is subject to the proviso that if the services were rendered
partly within and partly outside South Africa, only so much of that
pension/annuity as relates to the period during which services were rendered in
South Africa must be regarded as South African sourced income.
10(1)(gC) as it currently reads does not specifically refer to the source rule
contained in section 9(2)(i) in relation to pension benefits, although this
provision previously referred to the old deemed source rule for pensions, which
is no longer applicable.
previously taken the view that, in order for the section
10(1)(gC) exemption to apply, the pension fund must be situated outside
South Africa and the services in respect of which the pension is paid must have
been rendered outside South Africa. Accordingly, if the pension fund is
situated in South Africa, the exemption would not apply and the full monthly
pension would be taxable. The implication is that a pension is
regarded as being from a source outside South Africa if the pension fund is
situated outside the country.
SARS has now issued a Binding General Ruling (No.25) on 14 November 2014 to
provide clarity on the interpretation and application of the words "from a
source outside the Republic” contained in section 10(1)(gC) of the Act.
According to this binding general ruling, the term "source outside the
Republic”, for the purposes of section 10(1)(gC), refers to the originating
cause which gives rise to the pension income, namely, where the services have
been rendered. The ruling also sets out a formula for calculating the
portion of the pension that will be exempt due to services rendered outside
South Africa, which is effectively a proportionate amount based on the period
of foreign services relative to the total services rendered.
does not refer to section 9(2)(i) but refers to South African case law
regarding the source of income being the originating cause which gave rise to
that income. In terms of this ruling, the common law principle
regarding the source of income from services rendered should be applied to
pension benefits and the source of the pension benefit should be regarded
as being located where the services to which the pension benefit relates were
rendered. Where the pensionable services were rendered partly in and
partly outside South Africa, the source of the pension should be apportioned
between the South African services and the foreign services, in order to
determine the foreign sourced pension that should be exempt in terms of section
applies from the date of issue (14 November 2014) and will apply until it is
withdrawn or the relevant legislation is amended.
recipients of pension benefits whether from South African or
offshore pension funds, should ensure that the correct apportionment of
their pension benefit is done on the basis of their services
rendered abroad. Taxpayers who contributed to pension funds and who rendered
services both within and outside of South Africa are advised to contact their
SAIT tax professionals to determine if they may qualify for this exemption.
first appeared on ensafrica.com.