When SARS and Tax Treaties Disagree – Who Wins?

South Africa’s tax treaties play a critical role in determining how pension income is taxed, particularly for individuals who have emigrated. But when Parliament decides to change the rules, those treaties can become inconvenient obstacles, and the consequences for ordinary people can be severe.

For many South Africans living abroad, this is no longer theoretical. It is a high-stakes issue that directly affects their retirement savings.

The Question Behind Retirement Taxation

Imagine spending thirty years working in South Africa, consistently contributing to a pension fund, watching it grow, and planning your retirement around it. You later emigrate, settle in another country, pay your taxes there, and years later decide to draw your retirement savings. You fully expect to be taxed, but where, and by whom?

This is not a hypothetical question. For South Africans living in countries like the United Kingdom (“UK”), Australia, and Canada, it is a very real and largely misunderstood issue. The question sits at the intersection of two systems:

–       South African domestic tax law

–       Double Taxation Agreements (DTAs)

What happens when South Africa’s domestic law says one thing and a binding international treaty says another? This tension has a name: treaty override.

How South African Tax Treaties Affect Pension Taxation

South Africa has entered more than seventy DTAs globally. These agreements exist to prevent the same income from being taxed twice and to create certainty for taxpayers operating across borders.

Each treaty allocates taxing rights between countries depending on the type of income (salary, dividends, interest, pension). Under the OECD Model Tax Convention, pension income is taxed in the country in which the individual is tax-resident.

For example:

If a South African emigrates to the United Kingdom, ceases South African tax residency, and later draws a pension, the SA-UK DTA  states that the country where the individual is a tax resident will have the taxing rights (which is the default under most DTAs), leading to the UK having the taxing rights on the pension income, not South Africa. This makes intuitive sense. But it creates a real fiscal problem for South Africa.

The Domestic Law Response

South Africa’s Income Tax Act contains provisions that seek to tax individuals at the point of emigration, when they cease their South African tax residency. They are treated as having disposed of certain assets at market value on that date.

The intention is to tax the growth accumulated while the person was still within South Africa’s tax net.

However, retirement funds present a unique complication, particularly in the context of South Africa tax treaties and pension taxation. Contributions to a South African pension fund were made from pre-tax income, meaning tax is deferred until withdrawal. If a taxpayer emigrates and later withdraws funds while living in a treaty country that has exclusive taxing rights, South Africa may never collect the deferred tax.

Parliament has responded by tightening domestic rules over time. Emigration procedures have changed, and withdrawal conditions have become more stringent. But here lies the fundamental tension.

Tightening domestic law does not automatically override a tax treaty. South Africa is bound by its international commitments, and a treaty is not simply set aside because Parliament passes a new law.

What Is Treaty Override and Why Does It Matter?

Treaty override occurs when domestic legislation conflicts with existing treaty obligations.

South Africa’s constitutional framework gives international agreements a respected place in the legal hierarchy. Under principles like pacta sunt servanda (agreements must be honoured), countries cannot simply ignore treaty commitments.

Yet this is precisely the tension that arises in the pension fund context. If a DTA says the residence country taxes the pension, and South Africa then enacts provisions seeking to tax that same income at source, the domestic law and the treaty are in direct conflict. The taxpayer is caught in the middle, potentially facing claims from two tax authorities or finding themselves in a legal grey zone where their rights are genuinely unclear.

The 2021 Turning Point

It is worth noting that South Africa has not always been passive on this issue.

In 2021, a proposed amendment (section 9HC to the Income Tax Act) aimed to explicitly include retirement fund interests in the deemed disposal on cessation of residency. However, during the public consultation process, numerous submissions raised concerns that it could result in a treaty override. National Treasury ultimately withdrew the proposal, acknowledging the conflict and indicating that renegotiating DTAs would be the more appropriate solution.

The 2024 Taxation Laws Amendment Act added another complication, explicitly excluding retirement fund interests from the exit charge altogether. This means:

–       Tax on these funds is deferred until withdrawal

–       South Africa’s ability to tax it, given its DTA obligations, remains uncertain.

Importantly, South Africa is not currently committing treaty override in the technical sense. Treaty override requires specific domestic legislation that explicitly or effectively overrides a treaty obligation, and no such legislation presently exists in this context. The concern is prospective, as domestic pressure to protect the revenue base intensifies, the temptation to legislate in ways that conflict with existing DTA obligations will grow.

Why This Matters for Individuals and for South Africa

This creates real uncertainty in how South Africa tax treaties affect pension outcomes for individuals living abroad. Many South Africans who emigrated years ago structured their finances based on existing treaty frameworks, only to find that domestic law amendments have shifted the ground beneath them. Their financial adviser may not be aware of the full interaction between domestic and treaty law, and fund administrators rarely flag cross-border tax risks.

For South Africa, the stakes are equally high but for different reasons. The country has experienced significant emigration of skilled professionals over the past decade, many of whom retain substantial retirement savings locally. If those funds are ultimately taxed elsewhere under treaty allocations, South Africa will incur a permanent loss of tax revenue.

What Needs to Happen

Overriding treaties through domestic legislation is not a viable path. It would:

–       Undermine South Africa’s credibility as a treaty partner

–       Increase the risk of international disputes

–       Damage investor confidence

The honest answer is that South Africa’s DTA network needs targeted renegotiations to reflect modern realities. The standard OECD approach, allocating pension-taxing rights exclusively to the resident state, does not serve South Africa’s fiscal interests in an era of significant skilled emigration.

Through the African Tax Administration Forum (ATAF), several countries have advocated for treaty models that allow shared taxing rights on pension income between source and residence states.

In the meantime, South Africans with retirement savings in local funds, whether residents or emigrants, should seek specialist advice on how their treaty position interacts with current domestic law. The gap between what the law says and what people assume it says can be very costly.