If you are considering naming a child who has emigrated as a beneficiary in your South African trust, recent tax law changes could significantly increase the cost of doing so.
Previously, appointing a non-resident beneficiary had minimal impact on the trust’s tax position. Now, amendments to the Income Tax Act 58 of 1962, effective from 1 March 2024, have introduced important rules that trustees and settlors need to understand before making such changes. Non-resident beneficiaries, such as children who have relocated and become tax resident in another country are now subject to specific tax treatment and exchange control requirements that must be factored into trust planning.
Section 25B of the Act governs the taxation of income in trusts, while paragraph 80 of the Eighth Schedule addresses capital gains. Before the amendment, the “conduit principle” applied equally to both resident and non-resident beneficiaries. This meant that any income allocated to a beneficiary during the year of assessment would pass directly through the trust to the beneficiary, who would then pay tax on it, often at a lower effective rate than the trust itself. The trust was not taxed on that amount.
From 1 March 2024, the position has changed for non-resident beneficiaries. The conduit principle no longer applies to them. Instead, any income distributed to a non-resident beneficiary will now be taxed in the trust at a flat rate of 45%, regardless of whether the amount is actually paid out to that beneficiary. This change aligns the treatment of income distributions with the long-standing rules for capital gains, where any capital gain allocated to a non-resident beneficiary remains taxable in the trust, rather than in the hands of the beneficiary.
These amendments have major consequences for trust administration and estate planning. Adding a non-resident beneficiary without understanding the new rules could substantially increase the trust’s tax burden. Trustees must assess the long-term financial impact and engage in careful planning before making any amendments to the trust deed.
It is essential for trustees and beneficiaries to discuss the potential tax implications in detail before proceeding. Professional advice from a trust, estate planning, or tax specialist can help in identifying strategies to reduce the financial impact and ensure compliance with both tax laws and exchange control regulations. Thoughtful planning today can prevent unexpected tax liabilities tomorrow.
