The 3-year rule to access retirement funds.
The Taxation Laws Amendment Act 2020, and the Tax Administration Laws Amendment Act 2020, were promulgated on 20 January 2020.
Up until now, access to the retirement annuity funds (RA) and preservation funds were limited prior to retirement, with one of the exceptions being linked to emigration or the cessation of a visa. If a member formally emigrated via the SA Reserve Bank and SARS or a member’s residency/work visa expired, that member could withdraw the full fund value (subject to withdrawal tax).
The amendment focuses on members that are emigrating from SA. The section pertaining to visa expiry (paragraph (1)(b)(x)(dd)(B)) remains unchanged and the old rules in this instance will continue to apply.
Therefore, the amendment is focused on members that are SA residents for emigration purposes and tax purposes (versus visa expiry that will only impact tax residency as they never formally immigrated into SA).
As a result a new test to determine if an emigrating member can access their funds will apply. The new test determines that the member must remain a non-resident for three uninterrupted years or longer on or after 1 March 2021, at which time they can access their retirement annuity and/or preservation funds prior to retirement.
(Note – where a member of a preservation fund has not utilised the one withdrawal option, they will have access to the preservation fund benefits irrespective of emigration or residency status, by using the one withdrawal prior to retirement. The 3-year rule will therefore only be applicable to members that have already used the one withdrawal option and would like access due to them leaving the country prior to retirement.)
The amendment allows for a transition period. It determines that the current rules (pre-1 March 2021 rules) will continue to apply where a person has submitted their emigration application to the SA Reserve Bank on or before 28 February 2021 and that application is approved on or before 28 February 2022.
So, if a person has submitted their application by the end of this tax year, they will still be able to access their RA or preservation fund benefits in full, when that emigration is approved – as long as it is approved by 28 February 2022.
– If the submission of the completed application is not done prior to or on 28 February 2021 – the new 3-year rule will apply.
– If the submission is made, but it is not approved on or before 28 February 2022 – the new 3-year rule will apply.
Remember – the cessation of SA tax residency is a deemed disposal for capital gains tax purposes of all assets, except fixed property. Therefore, an application that is made simply to avoid the 3-year rule can result in a capital gains tax liability that is not planned for. It is important that the taxpayer considers all the consequences of starting the emigration process before 28 February 2021 and it is advised that they should consult with their tax practitioner before making the final decision.
Note – the accessibility referred to above only applies in respect of retirement annuity funds and preservation funds. It does not apply to living annuities or any compulsory life annuities. Living annuities are only accessible if the fund value is less than R125 000. The accessibility referred to above only applies prior to retirement – once a member has retired from their retirement annuity fund or preservation fund, the 3-year rule will have no further relevance.