New laws targeting foreign retirement funds are still on the cards for South Africa, while SARS is also expected to crack down on local trusts.

Recent commentary from law firms ENS and Wright Rose-Innes highlighted how changes in policy direction and stricter enforcement could have significant implications for taxpayers, trustees, and beneficiaries.

One area under growing scrutiny is the tax treatment of foreign retirement benefits received by South African tax residents.

Under current tax law, such benefits can be fully exempt from South African tax in specific circumstances.

The exemption applies where a lump sum, pension, or annuity is received from a source outside South Africa as consideration for past employment performed outside the country. 

For many South Africans who worked abroad and later returned home, this exemption has provided certainty that their retirement savings would not be taxed twice.

However, this position came under threat during the 2025 draft tax legislation process. 

National Treasury proposed deleting the exemption, which would have meant that South African tax residents would be taxed on foreign-sourced retirement benefits from 1 March 2026. 

According to ENS, the government noted that deleting the exemption would prevent double non-taxation of retirement benefits and allow South Africa to exercise its taxing rights under applicable double tax treaties.

Following strong public feedback, the proposal was withdrawn. However, the issue is far from settled.

ENS warned that the National Treasury made it clear that a renewed consultative process with stakeholders would follow, raising the expectation that revised proposals may still be introduced.

ENS cautioned that removing the exemption without careful design could create serious unintended consequences. 

“In our view, the removal of the tax exemption would result in significant issues which should be considered before this change is legislated,” the firm said.

One of the main concerns is the risk of double taxation. ENS warned that many foreign retirement benefits are funded out of after-tax income, meaning that taxing them again in South Africa could unfairly penalise returning residents.

The firm also stressed that South Africa would need a comprehensive legislative framework to properly address foreign retirement benefits and ensure alignment with the taxation of benefits from local retirement funds. 

Without such a framework, taxpayers could face uncertainty, inconsistent treatment, and costly disputes with SARS.

Cracking down on Trusts

At the same time, SARS is tightening the screws on trusts, an area that has historically suffered from widespread non-compliance.

Wright Rose-Innes has warned that SARS plans to implement administrative penalties for non-compliance with trust tax return submissions from the beginning of 2026.

“Trustees should take note of this deadline as trusts remain firmly on SARS’s radar,” the firm said.

All South African trusts are required to register for income tax and submit annual tax returns, regardless of whether the trust is active or dormant. 

Wright Rose-Innes noted that SARS is preparing to conduct deep reviews of trust compliance and will impose penalties where returns have not been submitted.

These penalties can materially weaken a trust’s financial position and create avoidable legal and administrative costs.

SARS is also increasing its use of data matching. The revenue service is cross-referencing information from the Master of the High Court with data from third-party providers to identify trusts that are registered with the Master but not with SARS for tax purposes.

Trustees of such trusts can expect final demands requiring submission of outstanding tax returns. Failure to comply will trigger penalties and further enforcement action.

The firm cautioned trustees not to wait for SARS to act. Bringing a trust fully up to date can be a lengthy process, especially where years of non-compliance need to be remedied. 

In addition to financial statements, trust tax submissions require accurate beneficial ownership records, trustee meeting minutes, trustee resolutions, and supporting trust documentation. 

Wright Rose-Innes stressed that trustees should begin the process as soon as possible to meet SARS’s 2026 deadline.