Recently on our blog, we unpacked four important facts about distributions from South African inter vivos trusts to non-resident beneficiaries. Now, we’re going to discuss the processes that need to be followed when making a distribution to beneficiaries of inter vivos trusts living abroad.
But before we get into the nitty gritty of trust distributions, let’s do a quick recap of inter vivos trusts in South Africa.
What is an inter vivos trust?
An inter vivos trust is a trust created by the settlor during his lifetime. The settlor transfers assets to the trust, and these assets are held by trustees, who manage the trust on behalf of its beneficiaries.
What is an inter vivos trust used for?
- Asset protection: Trusts can be used to protect assets from creditors, divorce, and other legal risks.
- Estate planning: Trusts can be used to ensure that assets are distributed according to the settlor’s wishes after their death.
- Tax planning: Trusts can be used to reduce taxes on income, capital gains, and estate duty.
There are a number of ways to fund an inter vivos trust. The settlor can transfer assets to the trust by:
- Selling assets to the trust
- Making a gift of assets to the trust
Once the assets have been transferred to the trust, the trustees assume control of the assets and manage them for the benefit of the trust’s named beneficiaries.
How does an inter vivos trust pay out its beneficiaries?
It is important that the trust deed clearly specify who the beneficiaries are, while detailing their rights and entitlements, and the conditions under which distributions should be made.
- Trust income distributions: The trust may generate income from various sources, such as rental properties, investments, or business profits. In line with the trust deed’s provisions, the trustee may distribute the trust’s income to the beneficiaries at specific intervals (e.g., annually or quarterly) or as needed.
- Discretionary distributions: In some cases, the trustee may have discretionary powers to determine when and how much to distribute to each beneficiary based on their individual needs and circumstances.
- Capital distributions: Besides income distributions, the trust may also make distributions of capital to beneficiaries, subject to the terms outlined in the trust deed.
It is important to note the nature of the distribution, as this determines the taxation of the income in the hands of the beneficiaries.
Inter vivos trust taxation: who pays what?
Understanding the tax implications for beneficiaries can be complex at first. The conduit principle means that any income or gains earned in the trust are passed on to beneficiaries while holding onto their original nature. So, if a beneficiary receives dividends, they are taxed as dividends, and if it’s interest, it’s taxed as interest. The responsibility for paying taxes lies with the beneficiary, not the trust.
Noting the nature of the income is important because individual beneficiaries may qualify for specific tax concessions that trusts do not. However, for non-resident beneficiaries, capital gains are taxed at the trust level (using the trust’s tax rate) but once paid out, the beneficiary will not have further tax implications in South Africa on capital gains already taxed at the trust level.
Inter vivos trust distributions: how do they work?
As a South African living abroad, you fall into one of the following categories from a tax/exchange control perspective, as indicated in the infographic below.
As you can see, depending on your tax status, the nature of the distribution as well as the amount to be distributed from the inter vivos trust, you will need to follow certain tax compliance and exchange control procedures in order to get your money.
A few things to note about tax and exchange control procedures to follow for non-resident beneficiaries:
To access their trust distribution, non-resident beneficiaries must now use the SARS Approval of International Transfer” (AIT) application.
- The AIT TCS PIN has replaced the “Emigration” and “Foreign Investment Allowance” Tax Compliance PIN.
- It is the responsibility of the beneficiary receiving the distribution (and no longer that of the trustee) to apply for the AIT.The new SARS AIT TCS process has also introduced an additional paperwork requirement and a non-resident beneficiary must also be able to produce a Non-Resident Confirmation Letter from SARS as one of the paperwork requirements.
FinGlobal: cross-border financial specialists for South Africans
Need a hand simplifying the complicated process of getting your inter vivos trust distributions remitted offshore? FinGlobal can assist. We’re ready to help you with all the paperwork requirements involved in getting tax clearance from SARS, and can help you with getting your hands on the new SARS Non-Resident Confirmation Letter. We can also assist you with all aspects of expat tax compliance and tax emigration, as well as all foreign exchange transactions.
To get started with our convenient, secure, confidential financial solutions and tax advisory services, please leave your contact details below or send an email to firstname.lastname@example.org.