Foreign Pension Schemes: There Be Dragons, and Some Confusion: South African Members Qua Beneficiaries Have a Vested Right to the Income and Capital of the Foreign Pension Scheme (Trust) Ab Initio — Part 2

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v14_n4_a2
• Author: Des Kruger Kruger
• Pages: 1-21
• Date: 01 December 2023
• Published date: 01 December 2023
• Published By: Siber Ink

1

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Foreign Pension Schemes:

THERE BE DRAGONS, AND SOME CONFUSION:

SOUTH AFRICAN MEMBERS QUA BENEFICIARIES HAVE

A VESTED RIGHT TO THE INCOME AND CAPITAL OF

THE FOREIGN PENSION SCHEME (TRUST) AB INITIO —

PART 2

DES KRUGER*

Abstract

Given South Africa’s present political and economic position, a signifi cant

number of wealthy taxpayers are either engaged in making contributions to

foreign pension schemes or are contemplating doing so. As the heading to

this article suggests, the South African tax implications that arise when a South

African resident taxpayer embarks on this journey are complex and confusing.

Whilst SARS has provided some guidance in terms of a binding class ruling,

this guidance is limited to the position where the South African participants

participate in the foreign pension scheme as vested benefi ciaries — not the

general position. The ruling nevertheless provides some indication of SARS’

views as regards the application of the law in these circumstances. However,

SARS neatly side-stepped the real issue, namely that a strict application of the

law res ults in double taxation in certain instances by declining to rule on the

application of section25B of, and paragraph 80 of the Eighth Schedule to,

the Income Tax Act, 1962.

This article explores the South African tax implications that are triggered

for South African residents in consequence of their participation as vested

benefi ciaries in these foreign pension schemes — the situation addressed in

SARS’ binding class ruling.

The South African implications that arise are wholly dependent on the

rights and obligations that are established under the foreign pension scheme

rules. However, as a general proposition it may be said that under a vested

scenario the South African participants are required to make regular contri-

butions to the foreign pension scheme, although lump sum contributions

are allowed in certain instances. The contributions are then accounted for

in a bespoke account, as is any accretion in value. When the time comes

for payment of the retirement benefi ts (the income capital will already have

vested in the benefi ciaries), the trustees generally have a discretion as to the

nature and value of the payments — but the participant has a right to request

the trustees to exercise their discretion in a specifi c manner.

The article concludes in the fi rst instance that the contributions made by

the South African participants to the foreign pension scheme do not consti-

tute a donation that is subject to donations tax. As regards accretions in value

in the bespoke account (e g interest, dividends, realised capital gains, the

article argues that those amounts fall to be taxed in the hands of the resident

* Consultant, Webber Wentzel, Adjunct Professor, University of Cape Town.

2VOLUME 14 • ISSUE 4 • DECEMBER 2023

Business Tax & Company Law Quarterly

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Once the trustees exercise their discretion to pay the South African partici-

pants either an annuity or a lump sum, South African income tax or capital

gains tax is triggered again. A possible double taxation conundrum accord-

ingly arises should any income or capital derived by the foreign pension

scheme have previously been vested in the South African benefi ciary.

On death, it is strongly arguable that the amount standing to the credit of

the resident benefi ciary in his or her bespoke account does not form part of

the deceased South African benefi ciary’s estate for estate duty purposes, or an

asset for capital gains tax purposes.

Introduction

There are a number of foreign pension schemes that have made offerings

to South African residents. The tax implications that arise in consequence

of South African residents participating in these retirement offerings are

complex and, in some respects very uncertain. These foreign pension

schemes are in the main structured as a trust arrangement, with the South

African participants being either discretionary or vested benefi ciaries.

While not stricto sensu a cell structure as commonly understood, in

essence the fi nancial position of each participant is accounted for in a

bespoke account. This bespoke account will comprise the contributions

made by the participant and any growth in the value of such contribu-

tions. Any retirement benefi ts paid to the participant will accordingly be

accounted for in the bespoke account (but be the property of the trust), and

the participant’s retirement benefi ts will always be limited to the amount

standing to the credit of the participant in his or her bespoke account.

Generally, participants are entitled to annuities or lump sums on the

happening of specifi ed events, such as attainment of an age, death or termi-

nation. There is a large degree of discretion as regards the nature (annuities/

lump sums) and timing of the payments (regular/once-off/yearly), with the

participants able to request a certain payment regime, but generally subject

to the absolute discretion of the trustees of the scheme.

While the rules of each foreign pension scheme are naturally different

from one another, the rules are nevertheless also very similar when it

comes to the rights and obligations of the foreign pension scheme and

participants.

As noted in Part 1 of this article, while SARS has provided some guidance

in relation to the position of vested participants in Binding Class Ruling:

BCR 080, 12 August 2022 (‘BCR 080’), the ruling is, with respect, not suffi -

ciently comprehensive and, in my view, incorrect in relation to certain

positions adopted.

While Part 1 of this article explored in some detail the South African

tax position for South African participants who are discretionary benefi -

ciaries under the relevant trust arrangement — the predominant position