Be careful of the tax implications when donating to a trust that benefits people who are not resident in South Africa.
There is a widely held belief that there are no South African tax implications if the beneficiaries of a trust to whom the income of the trust is distributed, or in whom the trust's income vests, are non-residents.
This is not so. Since 2000, tax law has contained a provision (which was amended on December 13, 2002) that has sought to tax a person who makes a donation to a trust for amounts distributed to non-residents.
What does this mean?
Let's say that while you were a South African resident, you donated money or assets amounting to R500 000 to a trust.
The trust could be local or non-resident (in which case you used your R750 000 exchange control-approved allowance to make the donation). Let's also assume that you have paid the appropriate donations tax.
The beneficiaries of the trust are your children (all adults), two of whom live in South Africa and one who lives in Britain. The trustees have the discretion to distribute to any or all of the beneficiaries in whatever proportion they choose. The trust deed stipulates that, until the trustees have exercised their discretion in relation to the income and capital of the trust, the beneficiaries shall have no rights to that income or capital.
The trust earns rental income amounting to R50 000 in the tax year ended February 28, 2003. On February 20, 2003, the trustees distribute R15 000 to each child, and retain the remaining R5 000 in the trust.
The tax consequences will be that both South African children must each include R15 000 in their tax returns, and you must include R20000 in yours.
Why? Because you donated to the trust the money that has given rise to the income that has not been distributed by the trust, it (the R5000) is deemed to be your income in terms of a long-standing "attribution provision" in the tax legislation.
This provision, which serves the purpose of determining who must pay the tax on the income that is not distributed, has been in place for many years and applies regardless of whether or not you were a resident when you made the donation.
The 2002 amendment relates to a situation where, while you were a resident, you made a donation to a local or an offshore trust, and a non-resident beneficiary receives or accrues the income that arises as a consequence of that donation.
In this situation, unless that non-resident is charitable in nature (such as a South African public benefit organisation), you will be taxed on the income which the non-resident accrues or receives. This is because it is deemed to be your income.
Make sure you understand your tax position in relation to any trusts to which you have made a donation or settlement, or any situation where there has been an element of gratuity - for example, an interest-free loan - for the benefit of someone who is not resident of South Africa.
Remember that even if one or more of the beneficiaries is a non-resident and may have been taxed on the amount distributed in their country of residence, it does not mean you will not be taxed on the same amount.