Background: Exchange Control Restrictions on Trusts
Historically, SARB have generally prohibited SA resident trusts from making distributions to offshore trusts.
As a result of the above limitation, the practice has been that an SA resident trust would make a distribution or advance a loan to an SA resident individual beneficiary, who would then externalise the funds using their annual foreign investment allowance. The individual would in turn fund an offshore trust, typically via a loan bearing market-related interest, on which income tax would be payable in the SA tax resident beneficiaries’ hands. This approach was not only administratively burdensome but also tax-inefficient for the SA beneficiary.
However, SARB recently issued a directive to make it possible for:
- Foreign discretionary trusts to make distributions to SA resident trusts, and
- SA resident trusts to make distributions to foreign trusts, provided these are disclosed, comply with applicable tax laws, and are not implemented for avoidance purposes.
This marks a significant policy shift. Previously, SARB treated distributions by SA trusts to foreign trusts as capital exports that were generally prohibited. That said, SARB still regards these transactions as capital transfers, meaning the distribution must be reported as a capital export via the SA resident trust's authorised dealer, along with all relevant supporting documentation (trust deeds, resolutions, beneficiary schedules, etc.).
This relaxation signals a recognition by SARB that legitimate offshore trust structures can play a role in international estate planning and asset protection, provided that transparency with SARS is maintained.
Potential Tax Implications
While SARB has relaxed its exchange control rules to allow distributions from SA resident trusts to foreign trusts, taxpayers must remain aware that these transactions may trigger various tax consequences.
Below is a high-level overview of the key tax issues to consider:
- Attribution rules: Section 7(8) of the Income Tax Act, 58 of 1962 (“the Act”), together with paragraph 72 of the Eighth Schedule to the Act, contain the so-called “attribution rules”. In essence, where a ‘donation, settlement or other disposition’ is made by an SA resident to a non-resident and this results in the non-resident receiving income or capital gains that would have been taxable in SA had they been received by or accrued to an SA resident, those amounts may be attributed back to the SA resident donor for tax purposes.
A point of debate is whether a distribution by an SA trust to a foreign trust (i.e. a trust-to-trust distribution) could trigger the application of the attribution rules. While SARS has not issued specific guidance on this, it may be argued that where trustees make a valid distribution to a qualifying beneficiary in accordance with the trust deed, the distribution is not made by way of donation or disposition but rather in discharge of a fiduciary obligation imposed by law. On this basis, the attribution rules arguably should not apply. However, the position remains uncertain and may be challenged by SARS.
- Capital gains tax: To give effect to a trust-to-trust distribution, it may be necessary for the SA resident trust to dispose of assets in order to realise cash. Where such a disposal results in a capital gain and no such gain is vested in a SA resident beneficiary, the gain will be taxed in the trust at an effective rate of 36%.
- Dividends tax: Where the funds required for the distribution are held by a company in which the trust is a shareholder, the company may need to declare a dividend to the trust to facilitate the distribution. Any dividend declared and retained in the SA resident trust prior to the onward distribution to the foreign trust may attract dividends withholding tax at a rate of 20%.
- Estate duty: Where a SA resident retains influence or benefit over offshore trust assets, as anticipated in section 3(3)(d) of the Estate Duty Act, 45 of 1955, those assets could potentially be brought back into the estate for estate duty purposes upon death.
Increased Compliance Focus
While the SARB’s stance on cross-border trust distributions has softened, it is anticipated that SARS will apply increased scrutiny to such transactions to ensure tax, legal, and reporting compliance.
The approval process is now twofold:
- SARS requires that the trustees of the SA resident trust make formal application for a manual tax clearance to permit the offshore transfer. SARS will assess the tax compliance status of the trust, confirming that all returns are up to date and that any tax liabilities relating to the distribution are either settled or appropriately provided for.
- Once SARS issues a letter of compliance, this must be submitted to the authorised dealer (typically a commercial bank), who will then lodge the application with SARB for approval of the capital export.
A critical consideration is that the trust deed must explicitly allow for distributions to foreign beneficiaries and reference the foreign trust (by name or implication) as a beneficiary. If this is not provided for, the trustees may need to amend the trust deed before applying.
SARB currently assesses trust-to-trust distribution applications on a case-by-case basis, as no formal requirements have yet been incorporated into the Manual for Authorised Dealers, nor published in any SARB circulars.
Conclusion
The SARB’s recent relaxation provides a valuable opportunity for families with offshore trust structures to align their estate and succession planning goals. It introduces greater flexibility in the management and transfer of intergenerational and cross-border wealth.
However, this flexibility comes with greater responsibility. SA trusts seeking to distribute to offshore trusts must ensure full compliance with tax laws and exchange control requirements.
Moore’s private client, fiduciary and tax teams are well-positioned to assist with structuring, compliance reviews, and SARS applications to ensure trust-to-trust distributions are implemented correctly.