The treatment of foreign pensions

In terms of s10(1)(gC)(ii) of the Income Tax Act, No 58 of 1962 (Act) a pension received by or accrued to a resident from a source outside South Africa as consideration for past employment outside South Africa is exempt from the payment of tax. In terms of s9(1)(i) of the Act it is indicated that an amount is deemed to be sourced within South Africa if the amount constitutes a pension or annuity and the services in respect of which the amount is received or accrued were rendered within South Africa. However, if an amount is received or accrued in respect of services which were rendered partly within and partly outside South Africa, only so much of the amount as bears to the total of the amount the same ratio as the period during which the services were rendered in South Africa 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 South Africa.

In a number of instances the South African Revenue Service (SARS) has argued that the location of the fund paying the pension or annuity is decisive. To the extent that the fund is located in South Africa, it was argued that the source is in South Africa and therefore that the total amount is taxable in South Africa irrespective of the fact that the pension may relate partly to services that were rendered outside South Africa.

In terms of a Binding General Ruling No 25 (14 November 2014) SARS has now indicated that the reference to source in s10 of the Act refers to the originating cause that gives rise to the pension income, ie where the services have been rendered. Accordingly, a pension will be exempt to the extent that the services were rendered outside South Africa. A formula is used that divides the total pension between foreign services rendered and total services that have been rendered. To the extent that a portion of the pension thus relates to foreign services that have been rendered, it will be exempt irrespective of the fact that the fund is located in South Africa.