It has now become much easier for the South African Revenue Service (Sars) to collect taxes owed to it by tax non-resident beneficiaries of South African trusts when they receive income distributions.
The change to section 25B of the Income Tax Act adjusts the tax treatment of income distributions to non-resident beneficiaries. This can lead to double taxation in some cases.
When a South African trust distributes income to a non-resident beneficiary, it is subject to tax in South Africa. However, the non-resident beneficiary may also be liable to pay tax on the same income in the country in which they reside, depending on the tax laws of that jurisdiction.
The change came into effect on 31 July this year, and income distributions to non-residents will be taxed in the trust and not in the hands of the non-resident beneficiary.
Phia van der Spuy, the founder of Trusteeze, explains that the change flows from the “interplay” between the tax treatment of income and capital gains distributions to beneficiaries.
Section 25B deals with income (any interest or rental income), and paragraph 80(2) of the Eight Schedule of the Act deals with capital gains.
Section 25B has provisions to prevent tax avoidance when funds are moved to foreign trusts, and it addresses the taxation of income when it is assigned to beneficiaries, regardless of their residency.
Paragraph 80(2) came into effect 10 years after section 25B and deals with the vesting of assets (income of a capital nature) by a South African trust to a beneficiary, explains Matthys Briers-Louw, the chief executive of Taxforum Fiduciary Services.
“It outlines that when such assets are vested in a resident beneficiary, any resulting capital gain is linked to that beneficiary. However, if the beneficiary is a non-resident, the capital gain remains connected to the trust itself and is taxed within the South African trust at a rate of 36%.”
The effect in practice
Any non-resident taxpayer who receives South African-sourced income is liable for tax in South Africa. However, few pay it. The change to section 25B has now made it easier for Sars to collect the tax, and not only to collect the tax, but also to collect more than it would otherwise have been able to collect.
Briers-Louw provides an example of what the change amounts to in practice. When a South African trust distributes income to a non-resident beneficiary, the amount will now be taxed in the hands of the trust at 45%.
If South Africa does not have a double taxation agreement with the foreign country, the tax non-resident beneficiary may again be taxed on the amount received. This, in effect, amounts to double tax on the same amount, but taxed in different hands.
There is no mechanism to ease this tax burden. In the case of foreign income, the tax non-resident can claim a credit for the amount he or she paid in the foreign country against his or her South African tax liability. With trust income distributions, this is not an option because it is not the same taxpayer who is paying the double tax on the same amount.
Different outcomes
Concerns were raised about the different outcomes for beneficiaries. Income distributions from a South African trust to a non-resident will be taxed at 45% in the hands of the trust.
When the distribution is made to a resident beneficiary, the beneficiary is taxed at a rate ranging between 18% and 45%, depending on his or her income.
When a capital distribution is made from a South African trust to a non-resident beneficiary, the trust will be taxed at a flat rate of 36%, and capital distributed to a resident will be taxed at an effective rate of 18%.
Another issue is that all beneficiaries must be treated equally, so it will be difficult to benefit only resident beneficiaries while non-resident beneficiaries are sidelined.
Van der Spuy emphasises the importance of taking care when distributions are made willy-nilly. Income distributions may lead to double taxation for foreign beneficiaries because any amount they receive, whether it is an after-tax amount, may again be taxed in the foreign jurisdiction. Distributions, whether of a capital or an income nature, have tax and estate duty consequences.
Planning remains important
“It is not only about saving tax for the trust. There are much more important planning and tax calculations to consider aside from thinking you are doing the client a favour by submitting a zero-tax return for the trust,” says Van der Spuy.
She adds that there is no quick fix to reduce the impact of the latest change. Proper structuring takes time, and it costs money.
Her advice is to do proper planning, understand the worldwide family, and what it is you want to achieve. “It may be better to remove non-resident family members as beneficiaries, as you may be doing them a bigger disfavour by keeping them.”
Van der Spuy says it may even be prudent to consider undoing the trust structure. “In some jurisdictions, a South African trust is disregarded, so what are we achieving by hanging on to it?”
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
