Sean Fahy, Trust Officer, explains the tax consequences for trust beneficiaries living offshore.
Many South African families make use of discretionary trusts as part of their overall financial and estate planning, with a very common objective being to provide for future generations within a professionally managed entity.
But what happens in the case of beneficiaries of a South African trust no longer living in South Africa and being tax resident abroad? The United Kingdom or Australia in particular are popular destinations among emigrating families.
This is a question we at Personal Trust come across regularly, and the answer is important because the tax consequences can be quite different and more complex from what most expect.
The South African position
In recent years, South African trusts have come under increased scrutiny from SARS, with stricter compliance requirements and additional tax measures being introduced to curb perceived abuse.
Taxes that South African trusts currently face are summarised below:
- Income Tax: Trusts are taxed at a flat rate of 45% on income retained in the trust.
- Capital Gains Tax (CGT): Trusts are subject to an effective CGT rate of 36% (80% inclusion rate × 45% tax rate).
- Dividends Tax: Dividends received from South African companies are generally subject to 20% dividends withholding tax.
However, if income and realised gains are distributed to beneficiaries in the same year it is earned, the conduit principle applies, and the tax liability shifts to the beneficiary who pays tax at their own marginal rate (Section 25B of the Income Tax Act and Paragraph 80 of the Eighth Schedule). This benefit is no longer available to non-resident beneficiaries as of 1 March 2024.
Distributions to South African resident beneficiaries are not subject to further tax. This may however not be the case for non-resident beneficiaries.
The UK position
If you’re a tax resident in the UK, distributions from a South African trust can create unexpected tax bills. HM Revenue & Customs (HMRC) has strict rules on foreign trusts, and income or gains distributed to tax residents are often fully taxable in the UK – even if tax has already been paid in South Africa.
While the South Africa-UK double tax agreement may help avoid double taxation in some cases, the rules are complex, and relief is not automatic. Beneficiaries must also disclose their interest in the trust to HMRC.
The Australian position
Australia is similarly strict. Any distribution from a South African discretionary trust to an Australian tax resident is typically taxed in Australia, whether it comes from income or capital gains.
Again, the South Africa-Australia double tax agreement may provide some relief, but beneficiaries often find themselves needing to navigate both tax systems. Like in the UK, disclosure rules apply, and penalties for not reporting foreign trust income can be severe.
Planning ahead
If you are a trustee or beneficiary of a South African discretionary trust, it’s essential to plan carefully. We recommend the following approach:
- Coordinate with advisors in both South Africa and the offshore jurisdiction.
- Understand and plan the timing and nature of trust distributions.
- Ensure all reporting obligations are met to avoid penalties.
- Understand cross-border payment requirements and obligations on the trust and beneficiaries.
South African discretionary trusts remain powerful tools for estate and wealth planning, but for non-resident beneficiaries they bring added layers of tax, compliance and ongoing planning.
At Personal Trust, we assist clients in understanding these issues and in planning effectively for specific and often unique circumstances. If you would like to discuss your position in detail, please contact your Trust Officer.