If you have a South African trust and wish to add a non-resident beneficiary, such as a child who has moved abroad and is now a tax resident offshore, there are specific tax implications and exchange control regulations for non-resident beneficiaries that must be considered before doing so. Before adding a non-resident beneficiary, it is crucial to understand recent amendments to the Income Tax Act 58 of 1962 (“the Act’), which came into effect on 1 March 2024, and the implications these amendments may have.
Income vs. capital gains
Before delving into the implications, it is important to understand the difference between section 25B of the Act and paragraph 80 of the Eighth Schedule to the Act. Section 25B of the Act deals with income, while the latter addresses capital gains.
Before the amendment
To understand how section 25B of the Act impacts non-resident beneficiaries, consider the income tax implications before and after the amendment. Previously, the conduit principle applied to both residents and non-resident beneficiaries. In practice, this means that income distributed to a beneficiary during the specific year of assessment would flow through the trust to the beneficiary, who would then be taxed on that amount. In this case, the trust itself was not taxed, and the beneficiary was potentially taxed at a lower effective tax rate than the trust would have been.
After 1 March 2024
However, from 1 March 2024, when the amendment took effect, the conduit principle no longer applies to non-resident beneficiaries. The amount distributed to non-resident beneficiaries will be taxed in the trust at a flat tax rate of 45%, regardless of whether the income is declared to the non-resident beneficiary.
The recent amendments have thus aligned the tax treatment of income distributions with that of capital distributions for non-resident beneficiaries. A resident beneficiary is taxed on capital gains if the gain vests in them, typically at a lower rate than the trust would have paid. In contrast, where a capital gain is distributed to a non-resident beneficiary, the trust bears the tax liability.
Implications for trust planning
The tax implications for trusts are far more than they used to be before the amendment took effect. Careful planning is required before adding a non-resident beneficiary to a South African trust to mitigate tax implications and the financial impact on the trust.
Having a non-resident beneficiary in your trust comes with a few obstacles that require careful planning and diligent discussions between the trustees and beneficiaries before making any decisions. It may be useful to approach a trust expert, estate planning expert or a tax expert for professional advice to assist in mitigating the obstacles at hand and to guide the trustees and beneficiaries in deciding what they are comfortable with.
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