National Treasury and the South African Revenue Service (Sars) have published draft legislation that will close a loophole in the Income Tax Act that enables individuals whose tax residency ceases from “double dipping” the tax exemptions that apply to tax-free savings accounts (TFSAs) and retirement funds.
The proposed amendment is contained in the 2023 draft Taxation Laws Amendment Bill, which is one of the draft bills and regulations that will give effect to the tax proposals announced in the 2023 Budget.
The Income Tax Act was amended in 2022 to provide that when an individual ceases to be a South African tax resident, the annual interest exemption available to individuals in terms of section 10(1)(i) of the Act is apportioned and the capital gains tax annual exclusion available to individuals is limited (paragraph 5(1) of the Eighth Schedule to the Act).
The main aim of these changes was to address an anomaly that arises because of the two years of assessment that are created during a single 12-month tax period when an individual ceases to be a South African tax resident.
For example, when an individual ceases to be a tax resident on 1 June 2022, his or her year of assessment as a tax resident would have begun on 1 March 2022 but would be deemed to have ended on 31 May 2022. This constitutes a three-month year of assessment as a South African tax resident. The individual’s year of assessment as a non-South African tax resident would have thus begun on 1 June 2022 and ended on 28 February 2023, constituting a nine-month year of assessment as a non-tax resident. Both years of assessment (the three months and the nine months) would fall within a single 12-month tax period.
Reasons for the change
Other provisions in the Income Tax Act contain inconsistencies that result in the creation of two years of assessment during a single 12-month period when an individual ceases to be a South African tax resident. These provisions include:
- Section 12T(4)(a), which provides that for the exemption of returns earned from a TFSA to apply, aggregate contributions should not exceed R36 000 during a year of assessment.
- Section 11F(2), which provides for a deduction of aggregate amounts contributed to a retirement fund during a year of assessment. One of the criteria relating to this deduction is that it should not exceed R350 000 in any year of assessment.
As a result of an individual having two years of assessment in a single 12-month tax period when he or she ceases to be a South African tax resident, the individual may double-up on the TFSA annual contribution limit of R36 000, as well as the R350 000 used to calculate the allowable section 11F deduction. This is because the respective limitations are available per year of assessment and are not apportioned in instances where the year of assessment is less than 12 months.
This is contrary to the policy rationale for sections 11F and 12T of the Act. As such, an individual would be able to contribute R72 000 to a TFSA while enjoying tax-free status on the returns received from that account (R36 000 for the three-month period and another R36 000 for the nine-month period), as well as a possible maximum section 11F deduction of R700 000 (R350 000 for the three-month period and R350 000 for the nine-month period) during the 12 month from 1 March 2022 to 28 February 2023.
To address this anomaly and ensure alignment with other provisions of the Act, it is proposed that the following changes be made to the Act:
Apportion the annual TFSA contribution limitation: section 12T(4)(a)
Where any person’s year of assessment is less than 12 months, the contribution limitation that shall apply in terms of section 12T(4)(a) of the Act (currently R36 000) shall be the amount that bears to the amount referred to in section 12T(4)(a), the same ratio as the number of days in that year of assessment bears to 365 days.
Limit the amount used to calculate the allowable retirement contribution deduction: section 11F(2)(a)
Where any person’s year of assessment is less than 12 months, the amount stipulated in section 11F(2)(a) as used to calculate the allowable retirement contribution deduction (currently R350 000) shall be the amount that bears to the amount referred to in section 11F(2)(a), the same ratio as the number of days in that year of assessment bears to 365 days.
The proposed amendments will come into operation on 1 March 2024 and apply in respect of the years of assessment starting on or after that date.
Comments on the proposals must be submitted to Treasury’s tax policy depository at 2023AnnexCProp@treasury.gov.za and Sars at acollins@sars.gov.za by close of business on 31 August.
Click here to download the 2023 draft Taxation Laws Amendment Bill.
