Distributions by South African trusts to non-resident beneficiaries including trusts.

In September 2024, The South African Revenue Service (“SARS”) along with the South African Reserve Bank (“SARB”) announced a significant change in policy in that they would consider South African Trusts to make distributions to non-residents.

The South African Trust tax legislation regarding Trusts has undergone significant changes in the past two years, the most significant being that where a distribution of income is made to a non-resident, the conduit principle would not apply and that the income would be subject to income tax in the hands of the South African Trust (at 45%) prior to distribution.

In the case of a distribution of a capital accrual to a non-resident is concerned, from the time capital gains were taxed in South Africa, the capital gain has been subject to capital gains tax in the Trust (at 36%) prior to a distribution of that capital gain being made to a non-resident.

The distribution by a South African Trust to a non-resident is significant in that whilst distributions can be made to beneficiaries of a South African Trust who had (tax) emigrated from South Africa, a South African Trust is not entitled to hold non-South African assets and also is not entitled to any foreign exchange allowances and hence foreign distributions by a South African Trust had to either be made to an emigrant, who was a beneficiary of the Trust at the time of emigration, or distributions being made to a resident beneficiary who could then make use of their foreign allowances to externalise the funds so distributed.

Where however a South African tax resident donates funds, regardless as to the source of those funds, to a non-resident, such donation is subject to donations tax in South Africa, subject to the annual ZAR 100, 000 threshold. In addition, any income or capital made in consequence of a donation, settlement or other disposition to a non-resident is taxed in the hands of the donor.

The new dispensation itself is to be welcomed as it allows for the transfer of funds off-shore by a Trust to its beneficiaries, including foreign Trusts, without having to make distributions to SA tax resident beneficiaries who in turn would distribute to non-resident beneficiaries, possibly with adverse tax consequences. This creates a mechanism to fund off-shore structures without invoking the attribution rules contained in section 7 and 7C of the South African Income Tax Act.

In terms of the new arrangements, a Trust may apply to SARS for a tax clearance to remit funds off-shore. This will result in a full SARS audit of the affairs of the Trust and tax compliance.