Inter vivos trusts in SA: the facts about trust distributions to non-resident beneficiaries

If you are a beneficiary of an inter vivos trust in South Africa, and you’ve got plans to emigrate abroad or you recently relocated abroad, you probably have a few questions about your trust distributions. If you cease tax residency in South Africa, what will the restrictions be on receiving your income from the trust? What will the tax implications be, when receiving a trust distribution as a non-resident beneficiary?

What is an inter vivos trust?

This is a trust that is established while the founder is still alive for the purposes of estate planning and asset protection. The founder essentially ‘donates’ the assets to the trust, which is used to house the assets or investments for the beneficiaries. The trust and its assets are handled by the appointed trustees, and their conduct is governed by the trust deed used to establish the trust.

Why choose an inter vivos trust? What are the advantages?

An inter vivos trust is chosen where the founder wishes to set aside specific assets or investments for the sole benefit of the named recipients.

An inter vivos trust is a useful legal mechanism for a number of reasons:

Assets cannot be touched by creditors:

• Where a trust owns a family’s assets, these are protected from potential creditors.
• Assets held in trust do not fall into the personal estate of beneficiaries, and will therefore also be untouchable by the beneficiary’s creditors.
• Such assets may also be safe from claims stemming from matrimonial dispute, but it must be clear to the court that these trusts have been properly established and that they are not being used for shady purposes.

Seamless succession planning and legacy continuity:

• Because an inter vivos trust outlives the founder, it can span multiple generations which ensures that the trust continues to look after the beneficiaries long after the founder has passed.
• Once the founder has passed, the trust assets do not get swept into the winding-up process, and this ensures the beneficiaries have ongoing access to funds after the founder’s death.

Flexibility and choice:

• A discretionary inter vivos trust gives trustees the ability to manage the assets in the best interests of the beneficiaries.
• Using their discretion, the trustees can make decisions about the assets in response to changing circumstances, such as legislation and economic conditions.

Tax planning:

• If properly established, an inter vivos trust can be set up to lessen estate duty, income tax, capital gains tax, donations tax and transfer duty.
• Upon the founder’s death, assets held in trust will not be liable for estate duty, executor’s fees or capital gains tax.

Can a beneficiary of an inter vivos trust be a non-resident?

When income from a trust accrues to a beneficiary, the fact that a beneficiary is not a resident is irrelevant.

While certain distributions have previously been blocked by the Financial Surveillance Department in terms of the exchange control regulations, section B.2(J)(xii) of the South African Reserve Bank’s Currency and Exchanges Manual for Authorised Dealers now permits the distribution of capital and income from inter vivos trusts to non-resident beneficiaries.

• Capital distributions: You will be allowed to transfer these payouts abroad once you have been granted TCS – FIA (Tax Compliance Status – Foreign Investment Allowance) from the South African Revenue Service (SARS) for capital distributions of up to R10 million.
  • Transfers of more than R10 million offshore will need to meet a more exacting verification process from SARS and will then have to be approved by  the Financial Surveillance Department of the South African Reserve Bank.

• Income distributions: Such payments can be sent abroad up to an amount of R10 million.
  • It will be necessary to obtain a TCS – Good Standing from SARS every year.
  • Where the amount is greater than R10 million, a TCS – FIA will have to be sought and it will be necessary to complete the same verification process with SARS and SARB as for capital transfers over R10 million.

What documents are required to receive a trust distribution as a non-resident?

You will need to furnish SARS with the following documentation –

• Copy of the trust deed and latest available financial statements of the trust
• 3 months’ worth of bank statements for you and from the trust
• Resolution passed by trustees to make a capital / income distribution
• Details of the source of funds that made it possible for the trust to make a capital distribution.

SARS may require additional documentation from you, depending on the amount involved.

Is money received by a beneficiary of a trust taxable?

Income or gains acquired within a trust will, according to the conduit principle, flow through or be passed on to the beneficiaries of the trust, while holding true to the nature of the income itself.

• This means dividends received are passed on and taxed as dividends, interest earned and distributed is taxed as interest
• Such amounts are taxed in the hands of the beneficiary and not the trust. The fact that the nature of the income is also retained is very important, as natural persons qualify for certain exemptions, exclusions and rebates on certain income items which are taxed differently, while trusts do not qualify for such exemptions or rebates.
• Capital gains distributed to a non-resident beneficiary will however be taxed in the trust and can be distributed as after tax capital gains, with no further tax implications for the beneficiary

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