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Is SARS no longer allowed to issue a tax directive because of section 10(1)(gC)(ii)?

12 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Have paragraphs 2 & 11 of the Fourth Schedule to the Income Tax Act been replaced by section 10(1)(gC)(ii)?

My client worked in Namibia from July 1980 to July 1985 contributing to Namibian tax and pension fund in Namibian currency. He retired in June 2001 from the same company, but then started working in SA. Each year he gets directive to deduct employees’ tax on only 85.72% of his monthly remuneration.

This year SARS will not issue directive; stating exemption in terms of Section 10(1)(gC)(ii) of Income tax Act is applicable.

A: Sec 10(1)(gC) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) was amended by sec 19(1)(a) of the Taxation Laws Amendment Act (No. 22 of 2012) (hereinafter referred to as ‘the 2012 TLAA’) as follow:

‘... by the substitution in subsection (1)(gC) for subparagraph (ii) of the following subparagraph:

‘‘(ii) pension received by or accrued to any resident from a source outside the Republic [, which is not deemed to be from a source in the Republic in terms of section 9(1)(g), in consideration of] as consideration for past employment outside the Republic;’’...’

In terms of sec 19(2) of the 2012 TLAA, the amendment was deemed to have come into operation on 1 January 2012 and applies in respect of amounts received or accrued during years of assessment commencing on or after that date (i.e. from the 2013 year of assessment and onwards).

Sec 9 of the Act was substituted with new source rules of which sec 9(2)(i) relates to pensions by sec 22(1) of the Taxation Laws Amendment Act (No. 24 of 2011) (hereinafter referred to as ‘the 2011 TLAA’). Sec 22(2) of the 2011 TLAA determines that the new source rules come into operation on 1 January 2012 and apply in respect of amounts received or accrued during years of assessment commencing on or after that date.

The effect of the above two amendments are as follow:

Sec 9(2)(i) of the Act states the following:

‘... An amount is received by or accrues to a person from a source within the Republic if that amount—

(i) constitutes a pension or an annuity and the services in respect of which that amount is so received or accrues were rendered within the Republic: Provided that if the amount is received or accrues in respect of services which were rendered partly within and partly outside the Republic, only so much of that amount as bears to the total of that amount the same ratio as the period during which the services were rendered in the Republic bears to the total period during which the services were rendered must be regarded as having been received by or accrued to the person from a source within the Republic...’

Sec 9(2)(i) therefore determines that if the services in respect of which the pension is received were rendered partly within and outside South Africa, that an apportionment must be made to determine which part of the pension is from a South African source. The apportionment must be made as follow: total pension received x period in which the services were rendered in SA/Total period during which the services were rendered.

 

Sec 10(1)(gC)(ii) in its edited form determines that the following would be exempt from normal tax:

 ‘... pension received by or accrued to any resident from a source outside the Republic as consideration for past employment outside the Republic...’ (own emphasis added).

Sec 10(1)(gC)(ii) therefore exempts the portion of the pension which is, in terms of sec 9(2)(i), from a source outside of South Africa. Therefore to calculate the exempt portion you would have to use either one of the following formula:

1.          Total pension received – (total pension received x period in which the services were rendered in SA/Total period during which the services were rendered); or

2.          Total pension received x period in which the services were rendered in Nam/Total period during which the services were rendered.

Par 11(a)(ii) of the Fourth Schedule to the Act provides that the Commissioner may issue a directive to authorise an employer:

‘...to deduct or withhold by way of employees’ tax from any remuneration in terms of paragraph 2, a specified amount or an amount to be determined in accordance with a specified rate or scale, in order to alleviate hardship to that employee due to circumstances outside the control of the employee...’

Conclusion

Even though sec 10(1)(gC)(ii) was amended, sec 9(2)(i) read with the said section still has the effect that a portion of the pension would be exempt, being from a non-SA source. From the facts provided, we therefore disagree with SARS’ interpretation and it would seem unreasonable from SARS not to issue a directive in terms of the Fourth Schedule in this instance.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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