Foreign Pension Schemes: There Be Dragons, And Some Confusion — Part 1

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v14_n3_a4
• Author: Des Kruger Kruger
• Pages: 30-49
• Date: 01 September 2023
• Published date: 01 September 2023
• Published By: Siber Ink

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Foreign Pension Schemes:

THERE BE DRAGONS, AND SOME CONFUSION —

PART1

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 results 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 discre-

tionary benef‌i ciaries in these foreign pension schemes. The next article will

explore the position of South African residents that participate under a vested

benef‌i ciary regime — 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 discre-

tionary scenario the South African participants are required to make regular

contributions to the foreign pension scheme, although lump sum contribu-

tions 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 trustees 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 do not constitute a donation that is subject

to donations tax. As regards accretions in value in the bespoke account, the

article argues that until the trustees exercise their discretion to make payment

of the retirement benef‌i ts, no amounts can be said to have been received or

accrued to the South African participants.

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. A possible double taxation conundrum arises should

any income or capital derived by the foreign pension scheme have previously

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

DES KRUGER

Foreign Pension Schemes

31

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vested in the South African participant. On death, it is strongly arguable that

the amount standing to the credit of the South African does not form part of

the deceased South African participant’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 South African 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, 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 a specif‌i ed age, death

or surrender. The trustees generally have 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,

the rules are nevertheless also very similar when it comes to the rights and

obligations of the foreign pension scheme and participants.

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.

This article explores in some detail the South African tax position for

South African participants who are discretionary benef‌i ciaries under the

relevant trust arrangement — the predominate position in the marketplace.

BGR 080 is as a result not of specif‌i c application in this instance as it relates

solely to a vested benef‌i ciary scenario. However, BGR 080 is nevertheless

helpful in determining the tax position of the South African discretionary

benef‌i ciaries in relation to certain aspects.