South African Trusts 2023: two important changes in the Law

South African Trusts 2023: two important changes in the Law
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With an increasing number of South Africans living distributed across the globe, Zoom meetings and non-resident tax status are increasingly common for South Africans.

Two recent changes to the law regarding South African trusts that will have an impact on trustees and beneficiaries in the future:

  1. ALL trustees (not just “a majority” of trustees) are required at meetings
  2. distributions by SA trusts to non-resident beneficiaries to be taxed before distribution

Let’s take a closer look at each circumstance.

How many trustees are needed for resolutions to be valid?

It has been common practice for a South African trust deed to stipulate that, when decisions are made and resolutions signed, only a majority of trustees are required to attend meetings for those resolutions and decisions to be legally valid.

A recent Supreme Court judgement has resulted in an important change. For a resolution to be valid and binding on the trust, such a resolution must be signed and approved by all trustees (and not just the majority – regardless of what the trust deed stipulates).

This creates an extra administrative burden for SA trusts as all trustees are now required to attend meetings in order to make valid, binding decisions. It is also essential that accurate minutes are kept for each meeting to record decisions made and to note that all trustees were in attendance.

Double taxation on vested income for non-resident beneficiaries?

SA tax law used to contain an anomaly: a difference between how vested capital gains were treated compared with how vested income was treated, all with regard to resident versus non-resident beneficiaries of a trust.

In consequence, the SA Revenue Service could potentially miss out on tax revenue if vested income was paid out to a non-resident beneficiary (to be taxed in their country of residence) rather than being taxed in the hands of the trust in South Africa. Given that the tax rate for a trust is higher than that of an individual, there was a high probability that this would happen.

In July 2023, Section 25B of the Income Tax Act was amended to align the treatment of distributions by SA trusts to non-resident beneficiaries with the treatment of capital gains vested from a trust per paragraph 80 of Schedule 8.

Now any income vested in a non-resident beneficiary from a SA trust cannot be elected to be taxed in the hands of the non-resident beneficiary but will be taxed in the hands of the trust at a flat rate of 45%.

Thus, a non-resident beneficiary of a trust may now be subject to tax on income from the trust in the country where they reside. If there is a double taxation agreement (DTA) in place between SA and their jurisdiction, they should be able to avoid being taxed twice on the same amount. However, a concern arises that if the income is taxed in the trust, the non-resident may be unable to claim the tax credit per the DTA as the tax was paid by the trust and not the individual.

We recommend getting advice in both countries where your trust is going to make a distribution to a non-resident beneficiary.

By Lindsay Frost, CFP® CA(SA)