Trusts are useful for a variety of reasons. However, if they are not used for the right purpose or administered properly, they can turn out to be a headache. Notwithstanding that Treasury has tightened trust tax legislation over the years, there are still tax benefits to be had.
The risks that most people face with the taxation of a trust are not what they know, but rather what they don’t know. Here are five key things to remember about the taxation of your trust:
- There is no such thing as a dormant trust. If you have registered a trust, and even if it has no assets or generates no income, the trust must be registered for tax. This is because the South African Revenue Service (SARS) publishes a notice each year of the taxpayers who must file a tax return. Without exception, the SARS notice requires every trust that was registered during the year of assessment to file a return. It does not distinguish between trusts with assets and those without. If the trust is registered, then it meets the return filing obligation.
- Trusts are taxed at the highest possible rate of 45% on income and an effective 36% on capital gains. For this reason, trustees should, if possible, avoid income and capital gains being taxed in the trust. Instead, income and capital gains should, in the same year of assessment as received by the trust, be distributed to the beneficiaries to be taxed in the hands of the beneficiaries at a lower rate. In some circumstances, income and capital gains may be split between beneficiaries to maximise tax efficiency.
- When connected persons to the trust lend money to the trust, interest should be raised on the loan. Failure to levy interest on the loan will trigger an ongoing annual donations tax liability for the natural person lending the money for as long as the loan remains in place. To avoid this annual donation interest must be levied on the loan at a minimum rate of the repo rate plus 1%. On 1 May 2025 the repo rate was 7.5% making the minimum interest rate 8.5%.
- Be aware of the attribution rules that apply to a trust. These rules determine the circumstances where income will not be taxed in the hands of the trust or of any beneficiary, but in the hands of the donor or creator of the trust. For example, when a parent creates a trust for a minor child, by donating assets to that trust, the parent will be liable for the tax on the income produced by those assets, for so long as the child is a minor.
- From 1 March 2024 the benefit of the flow through principle no longer applies to foreign beneficiaries of South African trusts. Before the legislative change, income could be distributed to foreign beneficiaries to be taxed in their hands, and not at the higher rate of 45% in the South African trust. The same rule applies to distributions of capital gains to foreign beneficiaries.
The taxation of trusts can be complicated. If you are unsure about the taxation of your trust, rather than risk incurring an unexpected tax liability, contact a tax practitioner for assistance.
Tel: +27 31 570 5496, Email: graeme.palmer@gb.co.za