What South Africans living abroad need to know about living annuities and double taxation agreements

Sars is avoiding its duty and passing it on to others to apply on their behalf. Picture: Motshwari Mofokeng, Independent Newspapers.

Sars is avoiding its duty and passing it on to others to apply on their behalf. Picture: Motshwari Mofokeng, Independent Newspapers.

Published Apr 6, 2024


By William Louw

IF THERE is a DTA (Double Taxation Agreement) between South Africa and another country, non-tax residents earning a living annuity might not need to pay tax on the income in South Africa. However, some non-tax residents earning South African living annuities could inadvertently pay tax on the same income twice, if their South African tax affairs are not handled correctly.

In simple terms, a DTA overrides the domestic tax laws of the country as it is an agreement between the two governments to avoid or alleviate territorial double taxation of the same income by the two countries.

Where a DTA overrides the taxing rights of the living annuity, the taxpayer has two methods to deal with South African Revenue Service (Sars) taxing rights:

RST01 which is a tax directive obtained from Sars to exempt the future living annuity from SA tax for the next x number of years (currently three years).

RST02 which is an objection done after filing your tax return and receiving the tax assessment which is basically informing Sars that the fund paid Sars the PAYE (Pay As You Earn) as no RST01 tax directive is issued.

The RST01 system works fairly well. However, Sars is not applying the domestic tax law and DTA overrides the RST02 objection. The RST02 is usually required in year one and year two after tax emigration as the taxpayer at that point can’t prove to Sars that they are no longer tax resident, nor can they get the tax residence certificate from the foreign tax office in time. As such the fund (having no tax directive) complies with the normal South African tax law and pays Sars the PAYE as required.

Sars is now stating that the fund should be able to interpret and apply the relevant DTA override where a taxpayer is non-tax resident even if they pay PAYE to Sars. Should the fund not recode the IRP5 to show the income is exempt from tax then Sars will not apply the DTA and refund the taxpayer.

As such, Sars is avoiding its duty and passing it on to others to apply on their behalf. Bear in mind that the funds in question are not tax experts and do not claim to be tax experts in South African law or DTAs.

This is causing a taxpayer to have tax deducted in South Africa and then when they report the income and tax paid to the other tax office, the other tax office raises the taxes due to them legitimately and denies the tax credits as no taxing rights are held by South Africa. The onus is on the taxpayer to claim this back from Sars.

A non-tax resident earning South African living annuities could pay double taxes, and in some circumstances, this could be as high as 90% between South Africa and the other country.

Objection timeline (assuming success at appeal stage):

Tax returns can, at the earliest, be lodged in July.

The objection (RST02), at the earliest, be lodged in July.

The objection process with Sars usually lasts all of their allotted time as per the South African Income Tax Act (sometimes longer than their allotted time) being three months (and if extra documents are requested this is extended by the Act by a further 2 months). Thus October if no extra documents are requested (or the following January – if documents are requested (remember the deemed non-business days for the Christmas period).

The appeal process (if you can get to it) would then be 4.5 months. So the following April (or June).

Most countries require the taxes paid within two months of assessment with the latest date being the January following the tax year.

Should the taxpayer be caught in the trap in year one or year two, then the taxpayer only has the following option available to them: If there is a relevant DTA in place, the only real option the taxpayer has when Sars does this is to apply Mutual Agreement Procedures via their resident tax office. The taxpayer has three years from being notified by the “offending” tax office that they will not be taxed correctly.

* Louw is the director: Professional Tax Practitioner (SA) at Sable International.