Trusts In Focus – Succession Planning In South Africa

Trusts remain a cornerstone of South African succession planning for high-net-worth individuals and families. Properly structured and administered, trusts (in various forms but most commonly inter vivos   discretionary trusts) can be used to separate growth assets from individual personal estates (preventing potential onerous, even punitive, double taxation implications in South Africa, where death triggers both estate duty and capital gains tax), support multi‑generational wealth transfer, streamline the succession process, and provide governance, continuity and asset‑protection benefits.

Many South African residents (“Residents”) have accordingly either settled trusts themselves, or are beneficiaries of trusts (local, offshore or both).

This involves complex considerations from a South African legal, regulatory and tax perspective, with regulation sourced from both common law and statute.

Below, we set out certain important considerations and updates in this regard.

Settling and funding a trust: Key South African considerations

There are several key South African considerations to consider when settling a new trust or funding an existing trust. These include:

Tax residence and implications:  The nature and terms of the trust arrangement, as well as the identity, role and location of trustees (and protector/s, if applicable) should be considered to determine the tax residence of the trust, and any South African tax, regulatory or legal implications for Residents.

Donations:  Donations tax is levied on donations by Residents at the rate of 20% on donations up to an aggregate amount of ZAR30 million and 25% on donations exceeding ZAR30 million, subject to an annual ZAR100,000 exemption for individuals.

Deemed donations: Interest‑free or low‑interest loans advanced to a trust by or at the instance of a Resident natural connected person are likely to trigger the application of section 7C of the South African Income Tax Act (RSA ITA), which results in deemed annual donations equal to the difference between the interest rate actually charged, and the “official rate”. Deemed donations may also arise if property is disposed of by a Resident to a connected person, for less than market value.

Donor attribution rules: Where a trust is funded by a donation, settlement or similar disposition (which may include interest-free loans) by a Resident, the so-called ‘donor attribution rules' contained in the RSA ITA may attribute certain of the trust's income and/or capital gains to the funder.

Transfer pricing:  South Africa's transfer pricing rules may apply to cross‑border transactions between related parties.

Reportable arrangements:  Contributions made by Residents to offshore trusts where that Resident has or acquires a beneficial interest may trigger reporting obligations to the South African Revenue Service (“SARS”).

Exchange controls:  South Africa has exchange controls which regulate inter alia inflows and outflows. These controls would apply to cross-border transactions, as well as transactions between Residents and non-Residents. Depending on the nature and terms of these transaction, prior approval from an Authorised Dealer or the South African Reserve Bank (“SARB”) may be required.

Recent developments of interest

Income tax

Flow-through tax treatment may be applied to income and capital gains realised by trusts where relevant amounts are vested in beneficiaries in the same tax year (which runs from 1 March to 28/29 February of the following year). Legislation was recently amended to clarify that this flow-through treatment would not apply to Resident trusts where amounts are vested in non-Resident beneficiaries in the same tax year. The income tax rate applicable to trusts in South Africa is 45% and the effective capital gains tax rate is 36%.

Exchange control

Trust-to-trust distributions: A recent exchange control development allows a Resident trust to make application to SARB for approval to distribute funds to a foreign beneficiary trust, subject to relevant SARS verification processes. This has become a useful mechanism to externalise wealth from existing South African trust structures. However, the application process can be time-consuming.

Trust law

Beneficial ownership disclosure requirements:  Statutory provisions have been introduced to require beneficial ownership disclosures in certain circumstances, for trusts and beneficiaries.

Case law:  Recent case law has reiterated the importance of ensuring that common law requirements and trust-deed provisions are properly adhered to when trustees take decisions, to ensure the validity of the trust action.

Later life asset and/or cash transfers into trusts can be costly and complex. Although there are some mechanisms which may potentially mitigate the negative impact of certain of the anti-avoidance provisions mentioned above, early advice is crucial.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.