If you are the beneficiary of a South African inter vivos trust living abroad, there are some important things you need to be aware of in order to stay on the right side of exchange control regulations and income tax laws when it comes time to receive your trust distributions.
Four important facts about distributions from an inter vivos trust to beneficiaries offshore
1. South African trust distributions to foreign beneficiaries: some recent exchange control updates
The Financial Surveillance Department of the South African Reserve Bank has made some changes to the Currency and Exchanges Manual for Authorised Dealers (AD Manual) that deals with the treatment of assets previously blocked in terms of Exchange Control Regulation 4(2). Following these amendments, it is now possible to transfer abroad income and capital distributions from inter vivos trusts to private individuals who have formally emigrated from South Africa or ceased tax residency with the South African Revenue Service.
However, it is no longer the responsibility of the trustee to complete the necessary Tax Compliance Status (TCS) procedures, this must now be done by the individual beneficiary before the offshore transfer can be carried out. Where the amount to be transferred exceeds R10 million, the requirements of section B.2(J)(vii) of the AD Manual will apply.
To access their trust distribution, foreign/non-resident beneficiaries must now complete the Approval of International Transfer” (AIT) application with SARS, which has replaced the “Emigration” and “Foreign Investment Allowance” tax compliance options. It is a new requirement that an individual seeking to make an international transfer to receive their trust distribution must also be able to produce a Non-Resident Confirmation Letter from SARS as one of the paperwork requirements.
2. Can a non-resident be a trustee of a South African trust?
In South Africa, a non-resident can be a trustee of a South African trust if authorised by the Master of the High Court, but certain conditions must be met. When a person appointed outside the country handles trust property within South Africa, the provisions of the Trust Property Act apply to them, depending on the specific property. The Master has the authority to grant permission to a non-resident trustee under section 6 to perform duties in that capacity, but this requires the non-resident individual to first provide satisfactory security for the proper and faithful execution of their trustee duties. This requirement is in place to safeguard the interests of the trust beneficiaries to ensure that only qualified and reliable individuals can serve as trustees.
3. What is the South African tax on trust distributions to beneficiaries?
Understanding the tax implications for beneficiaries of a trust can be tricky. According to the conduit principle, income or gains earned within the trust are passed on to beneficiaries while retaining the nature of that income. This means if a beneficiary of a trust receives dividends, they are taxed as dividends, and if it’s interest, it’s taxed as interest. The tax responsibility lies with the beneficiary, not the trust.
This retention of the nature of the income/distribution is important because individual beneficiaries may be eligible for certain tax exemptions, exclusions, or rebates that trusts are not entitled to. However, for non-resident beneficiaries, capital gains will be taxed at the trust level (at the tax rate of the trust), but once distributed, the beneficiary will not face further tax implications in South Africa on those post-tax capital gains.
4. What are the rights of beneficiaries of an inter vivos trust in South Africa?
The rights of a beneficiary to an inter vivos trust in South Africa are determined by the specific trust deed that sets out the terms of the trust and details the rights of beneficiaries to that trust.
Generally speaking, the beneficiaries to an inter vivos trust have the right to:
- Receive income from the trust, according to the terms of the trust deed;
- Receive capital from the trust, according to the terms of the trust deed;
- Review the trust books/statements; and
- Bring a court action against trustees if they believe that the trustees are not acting in their best interests.
The specific rights of a beneficiary will depend on the terms of the trust deed. For example, the trust deed may specify the amount of income that a beneficiary is entitled to receive, or it may give the trustees discretion to decide how much income to distribute to each beneficiary. It is important to note that the trust deed can be changed at any time by the settlor (the person who created the trust).
FinGlobal: cross-border financial specialists for South African expats
If all of this sounds too confusing for you to handle on your own as the offshore beneficiary of a South African inter vivos trust, FinGlobal is ready and willing to help. We will help you to ensure that the correct tax and exchange control procedures are followed, so as to avoid any unnecessary delays in receiving your money.
To find out how we can simplify your cross-border financial transactions, leave your contact details in the form below and one of our helpful specialists will be in touch to discuss your requirements.