The tax landscape has significantly evolved in recent years, especially for South African expats and beneficiaries of trusts. The increasing trend of South African trust beneficiaries relocating overseas, ceasing tax residency or never having been tax residents, has led to substantial changes in the rules governing the tax on trusts within South Africa. The South African Revenue Service (SARS) has substantially revised the Income Tax Act to address the increasing complexities of trust taxation, impacting the tax treatment of income, capital gains, and distributions from South African trusts to non-resident beneficiaries. Here’s what you need to know about trust funds in South Africa and changes from SARS.
SARS tightens trust taxation on foreign beneficiaries
In recent years, SARS has introduced trust taxation measures to ensure that capital gains generated by South African trusts are taxed locally, rather than creating the need to pursue beneficiaries overseas, as was the case previously. This was particularly challenging when trust distributions were made to foreign trusts, as SARS often lacked information about individuals benefiting from the taxable amounts in such scenarios.
SARS has aligned the tax treatment of income and capital gains trust distributions for non-South African tax resident beneficiaries to address these awkward situations, effective 1 March 2024. This means that starting from the 2025 trust tax year, the “conduit principle” (subject to attribution rules) allows for trust distributions to be taxed in the hands of the beneficiary instead of the trust, only if the beneficiary is a South African tax resident.
Previously, people could pay out money from a trust to beneficiaries without checking if the beneficiaries in fact lived in South Africa. This grey area allowed trust funds in South Africa and beneficiaries to avoid paying taxes on distributions, but SARS will no longer tolerate this ambiguity. SARS wants all the details about trust payouts, including the tax residency status of all individual and trust beneficiaries, to ensure that no tax opportunity is missed. With this in mind, it is essential to remember that some people who used to live in South Africa might have stopped being tax residents without realising it. These people will also be affected by these new tax rules.
Read more: Trust distributions to foreign beneficiaries – be aware of potential double taxation.
Trust taxation in South Africa: attribution rules and tax implications for foreign beneficiaries
Amounts distributed by a South African trust to a foreign beneficiary will be taxed in the hands of a South African resident individual if they have the power to control distributions or terminate the trust, as per Section 7(6) of the Income Tax Act and Paragraph 71 of the Eighth Schedule.
According to Section 7 (3) and Paragraph 69, distributions of income or capital gains from South African trusts to foreign resident minor children (resulting from assets donated or funded by South African resident individuals) will be taxed in the hands of the parent. This applies even if the assets were sold to the trust on a soft loan basis.
However, after the death of the South African resident individual, these attribution rules may no longer apply. In community of property marriages, income accruing to a minor child may continue to be attributed to the surviving parent. This may even be the case where a loan account is bequeathed to a surviving parent.
Estate planners should be aware of these potential implications and uncertainties when dealing with such loans in wills, especially while we wait for SARS to clarify its position. Any remaining income and capital gains distributed to foreign resident beneficiaries after applying the attribution rules will always be taxed in the hands of the trust.
Read more: Protecting your assets and beneficiaries with a trust in South Africa: advice for expats.
Distributions to foreign trusts: new tax rules and requirements
South Africans previously faced challenges in distributing funds to foreign trusts. Historically, SARS often didn’t approve the release of funds when resident trusts made such distributions, making it difficult to fulfil the founders’ intentions and benefit foreign beneficiaries.
On 1 August 2023, SARS announced a significant update: They will now consider approving distributions from resident trusts to non-resident trusts, subject to specific requirements. Although the eFiling process may seem straightforward, it’s not a free pass for moving large sums offshore, and all parties involved must be aware of the exchange control allowances and rules at play.
Read more: Can a South African trust distribute capital to an offshore trust? The answer might surprise you.
Understanding the New SARS Approval Process for Foreign Trust Beneficiaries
Trustees must apply for a manual compliance letter from SARS via email. To receive approval, these requirements need to be met:
- The non-resident trust is listed as a beneficiary (named or as part of a class) in the resident trust’s instrument.
- All relevant terms and conditions for distributions in the resident trust’s instrument are followed.
- SARS verification confirms adherence to relevant tax laws.
- The resident trust demonstrates that all potential tax liabilities on the distribution are settled.
What supporting documentation is required by SARS? The specific documents that must be provided for “Approval of International Transfers” (AIT) include:
- Trust instrument copy
- Latest Letters of Authority
- Resolutions by resident trust trustees authorising the distributions
- Details of the distributed funds’ source(s)
- Recent bank statements (within 14 days of application)
- Recent trust share portfolio statement (within 1 month)
- Trust’s latest financial statements
The FYI on the taxation of trusts in South Africa
While the Reserve Bank has eased some exchange control requirements, SARS has implemented these measures to mitigate the resultant risks. In some cases, however, Reserve Bank approval might still be needed. Despite changes to trust taxation, the knee-jerk reaction of blindly closing South African trusts and moving funds offshore is not necessarily the most brilliant move.
Consideration of the tax Treatment of the Country of Residence: A Key Aspect of Trust Taxation
Many countries view foreign trusts unfavourably, and some legal systems don’t recognise the concept of a trust at all. This can create complex tax situations for South African trust beneficiaries who move to other countries. If you’re a beneficiary of a South African trust and you plan to live abroad for an extended period, it is essential to research that country’s tax laws regarding foreign trust beneficiaries. Consult with a tax advisor before relocating to avoid unexpected tax issues.
FinGlobal: cross-border financial specialists for South African expats
Distributing funds from a South African trust to non-resident beneficiaries can be complex. That’s why partnering with a reliable international financial solutions provider is essential. FinGlobal offers comprehensive assistance in handling all tax and exchange control aspects for financial transactions. Our services include tax emigration, tax clearance, tax refunds, international money transfers and more. Safe and convenient processes, no upfront payment required.
Ready to get started? Leave your contact information below, and we’ll reach out to discuss your specific needs.