Trusts are common financial tools in South Africa for managing and protecting wealth, but when it comes to tax, things can get a bit tricky, especially if some of the beneficiaries live outside the country. So, if you’re wondering how trust taxation in South Africa works when trust income is paid out to beneficiaries who might be residents or non-residents, you’re in the right place.
Can a South African trust hold offshore assets?
First off, yes – a South African trust can hold offshore assets. That means it can invest outside South Africa, but there are some rules. You’ll need to follow Reserve Bank guidelines and make sure everything is properly reported. If your trust has offshore investments, the tax treatment of the income or gains from those assets depends on where the money comes from and who ultimately benefits.
What types of trusts are common here in South Africa?
You’ll mostly hear about two types:
- Inter vivos trusts – these are set up while the person creating the trust (the settlor) is still alive.
- Bewind trusts – where a third party manages the assets on behalf of the beneficiary.
Both must be registered with the CIPC and SARS, and trustees must file a trust tax return every year.
Read more: How can an offshore trust protect your assets? What South Africans need to know.
How are trusts taxed in South Africa?
When it comes to tax, trusts are treated as taxpayers. If the trust keeps the income inside, it pays tax at a flat rate of 45%. But if the income is “vested” (basically allocated) to beneficiaries, then those beneficiaries are the ones who pay tax on it.
So, if you get income from a trust, you’re responsible for paying tax on that amount, whether you live in South Africa or not.
You might also hear about the IT3(t) form. That’s the certificate the trust issues to beneficiaries to show how much income was paid out.
Read more: Foreign trust beneficiaries – the truth about trust taxation in South Africa.
What happens when income is vested in beneficiaries?
Here’s where it gets interesting. If the income is vested in a beneficiary:
- If you’re a tax resident beneficiary (meaning you live in South Africa), you pay tax on that income as part of your regular tax return.
- If you’re a non-tax resident beneficiary, different rules apply because SARS wants to tax income that comes from South African sources.
What about trust distributions to non-resident beneficiaries?
If a trust pays out income to someone living outside South Africa, the trust usually must withhold tax on that distribution. This is called withholding tax on trust distributions to non-residents.
Typically, the trust must withhold 20% tax on those payments before sending the money. The exact rate might fluctuate if South Africa has a double taxation agreement (DTA) with the country where the beneficiary lives.
Here, the trust has to fill out an IT10-B form for these distributions. This keeps SARS in the loop and makes sure the right tax is paid.
Read more: Trust distributions to foreign beneficiaries – be aware of potential double taxation.
Taxation of trusts in South Africa – why does this withholding tax matter?
The withholding tax helps prevent double taxation. For example, the non-resident beneficiary might pay tax on the distribution in their home country, but the withholding tax in South Africa ensures SARS gets its share first. If the trust doesn’t withhold the tax correctly, it could face penalties and interest. So, trustees need to get this right.
Reporting and beneficial ownership – what trustees need to know
Transparency is a top priority for SARS right now, especially when it comes to trust in South Africa. As part of ongoing efforts to prevent tax evasion and money laundering, SARS now requires full disclosure of beneficial ownership.
So, what does this mean? It means the trust must declare who the ultimate beneficial owner is – that’s the person who benefits from the assets or income in the trust, even if they’re not the legal owner on paper. This applies to both local and non-resident beneficiaries, and it’s all about ensuring that SARS knows exactly where the money is going and who’s gaining from it.
This ties into what’s known as the conduit principle. In simple terms, the conduit principle allows a trust to pass income directly to beneficiaries without being taxed on it, as long as the income is properly vested in those beneficiaries. However, SARS wants to make sure this isn’t being used as a loophole to shift income offshore or avoid tax altogether.
To stay compliant, trustees must:
- Keep a valid Letter of Authority (issued by the Master of the High Court) to confirm they are legally allowed to act on behalf of the trust.
- Report all trust distributions accurately, including those made to non-resident beneficiaries.
- Issue IT3(t) certificates to all beneficiaries to reflect the income they’ve received during the tax year.
- Submit beneficial ownership information to SARS and possibly to the CIPC, depending on the trust structure.
Failure to do any of the above could result in penalties, audits, or even the trust losing its favourable tax treatment.
Long story short? Trustees must now go beyond simply managing the money – they also need to ensure full transparency around who receives what, and where they live.
Read more: Is your South African trust compliant with SARS? Here is what you need to know.
Can a non-resident be a trustee of a South African trust?
Good question! Yes, a non-resident can be a trustee, but it can complicate things. The trust still must follow South African tax rules and file returns regardless of where the trustees live. So, is it possible? Yes. Is it advisable? Not likely.
Read more:
What are the main paperwork forms trustees need to use?
- IT3(t): Shows how much income was paid to beneficiaries.
- IT10B: Needed when distributions go to non-resident beneficiaries.
- The annual trust tax return itself, where the trust declares all income, expenses, and distributions.
Considering dissolving a trust?
If you’re winding up a trust, you’ll need to settle any tax issues first. That means:
- Paying CGT on any asset disposals
- Submitting final tax returns
- Distributing any remaining money according to the trust deed
To wrap up what you need to know about taxation of trusts in SA:
- Trusts pay tax on income they keep, but income paid out to beneficiaries is taxed in their hands.
- If you’re a South African tax resident beneficiary, you pay income tax vested in you.
- If you’re a non-resident beneficiary, expect withholding tax on distributions, usually 20%.
- Trusts can invest offshore but must comply with reporting and exchange control rules.
- Trustees need to file the right forms (IT3(t)) and IT10B) and report beneficial ownership.
- Non-residents can be trustees but should understand the responsibilities.
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