If you are a South African living abroad with a living annuity, a Double Taxation Agreement can help avoid being taxed on the same income twice. SARS has made some important changes regarding who the responsibility falls to when it comes to claiming your money back when you get taxed in two countries.

Navigating the complexities of international taxation can be daunting, especially for non-tax residents earning a living annuity from South Africa. Fortunately, a Double Taxation Agreement (DTA) between South Africa and another country could offer significant relief. These agreements are designed to prevent the same income from being taxed twice across two different territories. In essence, a DTA supersedes domestic tax laws, providing a framework to avoid or reduce double taxation.

Where a DTA overrides the taxing rights of the living annuity, the taxpayer has two methods to deal with SARS’s taxing rights:

  • Tax directive (RST01): This directive from SARS can exempt your future living annuity income from South African tax for up to three years, ensuring it's not taxed twice.
  • Tax objection (RST02): After you file your tax return and receive an assessment, you can object to SARS if your income was taxed despite no RST01 directive being issued. This informs SARS that the fund has paid them the PAYE (Pay As You Earn) and facilitates the refunding of the income tax withheld in the country of source so that the tax resident can pay the correct taxes in the country of residence.

Typically, in the first two years following tax emigration, the RST02 is required because taxpayers struggle to demonstrate their non-resident status to SARS, and they are unable to acquire a tax residence certificate from the foreign tax office in time (which is required for an RST01). Consequently, without a tax directive, the fund adheres to standard South African tax regulations and pays the required PAYE to SARS.

This system has worked well in the past. However, SARS is now no longer applying the DTA overrides on the RST02 objection. SARS now expects the fund to interpret and apply the relevant DTA override for taxpayers who are non-residents, even though they are still subject to PAYE payments. If the fund does not adjust the IRP5 to indicate that the income is exempt from tax, SARS will not enforce the DTA or issue refunds to the taxpayer.

This shift of responsibility from SARS to the fund is problematic, especially since these funds are not tax specialists in South African tax law or DTAs.

This situation leads to taxpayers being taxed in South Africa and then potentially facing additional taxes from foreign tax authorities, who may deny tax credits because of South Africa not having the right to tax the income. The onus is on the taxpayer to claim this back from SARS.

As a result, non-resident individuals receiving South African living annuities may face double taxation, which, in some cases, could total up to 90% of their income between South Africa and the other country involved.

For those caught in this predicament and unable to get SARS to allow the refund in the initial years, the primary recourse is to pursue Mutual Agreement Procedures through the tax office in the country of tax residence. This option is available for up to three years after being notified of incorrect taxation by the foreign tax office.

Objection timeline

Understanding and leveraging the benefits of a DTA is essential for anyone earning a living annuity from South Africa while residing abroad. With careful management and timely objections, it's possible to mitigate the risks of double taxation and protect your financial interests.

We offer comprehensive tax services and advice to South Africans both at home and abroad, as well as anyone with South African income. Our tax practitioners can assist you with all of your tax requirements.

Get in touch with us at taxsa@sableinternational.com or by calling +27 (0) 21 657 1517.

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