South African Trusts Non-Resident Beneficiary Problem

The Impact of the Amended Section 25B of the Income Tax Act

The Taxation Laws Amendment Act 17 of 2023 (TLAA 17/2023) introduced

fundamental changes to section 25B of the Income Tax Act 58 of 1962. Effective

from 1 March 2024 (the 2025 year of assessment), these changes significantly alter

how South African resident trusts are taxed when making distributions to non

resident beneficiaries — irrespective of where in the world those beneficiaries reside.

The well-established conduit principle — under which a trust was treated as a

transparent vehicle and income flowed through to beneficiaries retaining its character

and source — has effectively been abolished for income vested in non-resident

beneficiaries. While the conduit principle continues to apply to resident beneficiaries

under section 25B and remains relevant for capital gains under paragraph 80 of the

Eighth Schedule, it no longer applies to income vested in non-resident beneficiaries.

From 1 March 2024, and subject to the attribution provisions contained in section 7

of  the Income Tax Act, income vested in a non-resident beneficiary is generally

taxed in the trust's hands at the flat trust rate of 45%.

For beneficiaries who have emigrated from South Africa or who were never South

African tax residents, this represents a seismic shift. The change:

·      Eliminates the ability of non-resident beneficiaries to be taxed at lower personal marginal rates on trust income;

·      Potentially creates economic double taxation — the trust pays 45% in South Africa while the beneficiary may be taxed again on the same amount in their hands in their country of residence;

·      Creates significant compliance obligations for trustees; and

·      Demands urgent reassessment of existing South African trust structures that were established with non-resident beneficiaries in mind.

The precise impact on any beneficiary will depend on the tax rules of their country of residence, applicable DTAs, and the nature of the income distributed. This document provides a general cross-jurisdictional framework applicable to beneficiaries in any foreign country.

1.            Background: The Conduit Principle and Section 25B

1.1.        The Conduit Principle

South African law has long recognised the 'conduit principle', under which a trust can acts as a transparent conduit: income and capital gains retain their identity and nature when they pass through the trust to a beneficiary in the same year of assessment. The

practical effect was that rental income remained rental income, dividends remained

dividends, and foreign income retained its foreign character — taxed in the

beneficiary's hands as if received directly.

This principle was codified in section 25B of the Income Tax Act for income, and in

paragraph 80 of the Eighth Schedule for capital gains. These two provisions

previously diverged in their treatment of non-resident beneficiaries — a disparity that

the 2023 amendments have now substantially closed.

1.2.        Capital Gains vs Income

Under paragraph 80 of the Eighth Schedule, the conduit principle was already restricted to only resident beneficiaries. Where a trust vested a capital gain in a non-resident beneficiary, the gain was taxed at trust level at the flat effective capital gains tax (CGT) rate of 36% (being 80% inclusion at the 45% trust rate). This was to prevent non-resident beneficiaries benefiting from the lower or often zero effective CGT rates that would have applied had the gain been seen to have arisen in their hands.

Section 25B, however, applied differently for income: before the amendments,

income could flow through the trust to any beneficiary — resident or non-resident —

provided the vesting occurred in the same year of assessment. This made South

African trusts particularly attractive for holding assets for the benefit of offshore

beneficiaries with limited South African source income.

1.3.        Section 25B Amendment: Aligning Income with Capital Gains Treatment

TLAA 17/2023 amended section 25B(1) and (2) to limit the conduit principle for

income to resident beneficiaries only, bringing income treatment into alignment with

the long-standing capital gains treatment under paragraph 80 of the Eighth Schedule.

The amendments became effective for the 2025 and subsequent years of assessment.

SARS and National Treasury confirmed in their February 2024 response document

that the change was a deliberate policy decision to prevent tax avoidance and to

ensure that income earned in South African trusts is appropriately taxed in South

Africa, even where beneficiaries have relocated abroad or were never South African

tax residents.

2.            Impact on Non-Resident Beneficiaries

2.1.        All Income Taxed at Trust Level

From 1 March 2024, and subject to the attribution rules contained in section 7 of the Income Tax Act, income vested by a South African resident trust in a non-resident beneficiary generally remains taxable in the trust and is subject to income tax at the standard trust rate of 45%.

In addition to the higher tax rate, many of the exemptions, exclusions and rebates available to natural persons would also not apply. These would include:

·      Section 10(1)(i) interest exemption of R23,800 for individuals under 65 and R34,500 for individuals aged 65 or older;

·      Primary rebate of R17,820; Secondary rebate (65 and older) of R9,765 and Tertiary rebate (75 and older) of R3,249; or

·      The annual exclusion for CGT of R50,000.

Once the trust has paid tax at 45%, any further distribution of that after-tax amount to

the non-resident beneficiary does not attract further South African income tax in the

beneficiary's hands. However, the 45% SA tax already paid by the trust cannot be

recovered by the beneficiary and may not be creditable in the beneficiary's home

jurisdiction as a rebate for foreign taxes paid.

2.2.        Loss of DTA Benefits

A significant consequence of the amendment is the potential reduction or loss of treaty

relief previously available to certain non-resident beneficiaries under South Africa's

network of Double Taxation Agreements (DTAs).

Prior to the amendment, income vested in a non-resident beneficiary could generally

flow through the trust and be taxed in the beneficiary's hands. Depending on the nature

of the income, the applicable DTA and the beneficiary's country of residence, the

beneficiary may in some circumstances have been able to access treaty benefits or

foreign tax credit relief.

Following the amendment, the income is generally taxed in the trust rather than in the

beneficiary's hands. This may make it significantly more difficult for a beneficiary to

access treaty relief or foreign tax credits in respect of the South African tax paid by the

trust. Whether treaty benefits remain available will depend on the wording of the

relevant DTA, the trust classification rules in the beneficiary's country of residence, the

concept of beneficial ownership under the applicable treaty, and the interaction

between South African and foreign domestic tax law.

As a result, the amendment may increase the risk of economic double taxation in

certain cases, particularly where the beneficiary's country of residence does not

recognise the South African tax paid by the trust as a tax borne by the beneficiary.

2.3.        Section 7 Attribution

The amended section 25B does not override the section 7 attribution rules. Where a

South African resident funded a trust by way of a donation, an interest-free or low

interest loan, or similar arrangement, the income of the trust may, in certain

circumstances, be attributed back to that donor under certain circumstance. In such

cases, the income is taxed in the hands of the donor (at the donor's marginal rate)

rather than in the trust's hands at 45%.

To the extent that section 7 attribution applies, the relevant income is generally taxed

in the hands of the donor rather than in the trust. Accordingly, the trust-level taxation

consequences introduced by the amended section 25B may not apply to that income.

The mechanism by which a trust is funded is therefore critically important and

represents a valuable planning opportunity for affected structures.

2.4.        Exchange Control Considerations

Separate from the income tax changes, the South African Reserve Bank (SARB)

issued Exchange Control Circular No. 3/2023 (May 2023), establishing the

conditions under which resident trusts may make income and capital distributions to

non-resident beneficiaries.

These transfers abroad are subject to the individual non-resident beneficiaries having

an Approved International Transfers Tax Clearance certificate for capital distributions

and SARS Tax Clearance Certificate of Good Standing for Income related payments.

3.            Tax Treatment in Foreign Jurisdictions

The tax treatment of distributions from a South African trust in the hands of a non

resident beneficiary will depend entirely on the domestic tax laws of the beneficiary's

country of residence and on any applicable DTA between South Africa and that

country

3.1.        How Foreign Jurisdictions Typically Classify a South African Trust

Most tax systems apply their own domestic rules to determine how a foreign trust is

taxed. Common classification approaches include:

·      Grantor / Settlor Trust Rules: Many countries (including the USA, UK, Australia, and Canada) have anti-avoidance or attribution rules that may tax a settlor, transferor, or founder on trust income where they retain certain powers, interests, or connections to the trust. Where such rules apply, some or all of the trust's income (and in certain cases gains) may be attributed to the settlor annually, even if no distribution is made. The scope and operation of these rules vary significantly between jurisdictions.

·      Beneficiary-Based Taxation: Where grantor/settlor rules do not apply, the beneficiary is typically taxed on distributions received, up to the trust's distributable income for the year. The character of the income (dividends, interest, capital gains, etc.) may or may not be preserved depending on the foreign jurisdiction's rules.

·      Accumulation / Throwback Rules: Some countries, most notably the USA, have anti-deferral rules that can impose additional tax and interest charges on distributions representing accumulated trust income from prior years

·      Territorial or Remittance-Based Systems: In jurisdictions that primarily tax local-source income, or that tax foreign income only when remitted, foreign trust distributions may be exempt or taxable only upon remittance. The treatment depends on the specific foreign trust rules of the relevant jurisdiction.

3.2.        Foreign Tax Credit (FTC) Availability

The most significant cross-border tax issue created by the amended section 25B is

whether a non-resident beneficiary can claim a foreign tax credit in their home

jurisdiction for the South African tax paid by the trust on income vested to them. The

answer depends on:

·      Whether the foreign jurisdiction recognises that a tax was effectively 'borne' by the beneficiary when paid by the trust;

·      Whether the applicable DTA between South Africa and the foreign jurisdiction allocates taxing rights in a way that provides credit relief;

·      Whether the income retained its character and source when flowing from the trust to the beneficiary under the foreign jurisdiction's trust classification rules; and

·      The foreign jurisdiction's domestic foreign tax credit rules.

In practice, the availability of foreign tax credit relief for taxes paid by a South African

trust is often uncertain and depends on the domestic law of the beneficiary's country

of residence and the provisions of any applicable DTA. Where the foreign jurisdiction

does not recognise the South African tax paid by the trust as a tax borne by the

beneficiary, economic double taxation may arise. This uncertainty is one of the

principal risks created by the amendment.

4.            Compliance Obligations and Enforcement Considerations

In addition to the increased tax introduced by the amended section 25B,

trustees of South African resident trusts should be aware that SARS has significantly

increased its scrutiny of trust structures in recent years. Trusts have become a

specific compliance focus area, with SARS making greater use of third-party data,

CRS information, and enhanced trust return disclosures to identify non-compliance.

4.1 SARS Focus on Trust Compliance

Trustees should expect increased scrutiny in relation to:

·       Beneficiary residency status and whether income has vested in resident or non-resident beneficiaries;

·       Section 25B calculations and the allocation of income between the trust and beneficiaries;

·       Section 7 attribution where trusts have been funded by donations, interest-free loans, or similar arrangements;

·       Consistency between trust tax returns and beneficiary disclosure.

4.2 Trust Tax Returns and Provisional Tax

The amended section 25B has increased the importance of accurate trust tax

reporting. Trustees should ensure that:

·      ITR12T trust returns are submitted annually and completed accurately;

·      IRP6 provisional tax returns are submitted where required;

·      The trust's financial statements, resolutions, and beneficiary schedules support the tax treatment adopted; and

·      Residency documentation is retained for all beneficiaries.

4.3 Penalties for Non-Submission

Importantly, SARS has become increasingly aggressive in imposing administrative penalties for outstanding trust returns.

Trusts that fail to submit required returns may face monthly fixed penalties, which can accumulate for extended periods and become substantial. In practice, many trustees have received assessments for multiple years of non-submission, even where the trust was dormant or generated little taxable income.

Given SARS' current enforcement approach, trustees should not assume that a dormant trust or a trust with minimal activity is exempt from filing obligations.

4.4 Exchange Control

Where distributions are made to non-resident beneficiaries, trustees must also ensure compliance with applicable South African exchange control requirements and the requirements of the authorised dealer facilitating the transfer.

5.            Planning Considerations and Recommendations

5.1.        For Trustees of South African Trusts with Non-Resident Beneficiaries

·      Conduct a full beneficiary residency audit: Identify and document the tax residency status of every beneficiary. Particular attention should be given to beneficiaries who may receive vested income, as income vested in a non-resident beneficiary may be subject to the amended section 25B regime.

·      Review vesting provisions: Determine whether income has already vested or will vest in non-resident beneficiaries, as vesting triggers the 45% trust-level tax.

·      Assess and fulfil IRP6 obligations: Engage a tax practitioner to determine whether provisional tax returns are required and ensure timely compliance.

·      Investigate section 7 attribution: Determine how the trust was funded. If a South African resident made a donation, interest-free loan, or similar transfer to the trust, section 7 may attribute income to that donor — avoiding the 45% flat trust rate. This is a critical planning mechanism.

·      Review DTA access: For each non-resident beneficiary, analyse whether the applicable DTA between South Africa and their country of residence can be invoked — and, if so, at trust level or beneficiary level.

·      Consider trust restructuring: Subject to legal and tax advice, it may be appropriate to consider restructuring the trust, modifying the beneficiary class, or changing the trust's asset composition to minimise the post-2025 tax impact.

·      Ensure exchange control compliance: All distributions to non-resident beneficiaries must comply with SARB Circular 3/2023 requirements.

5.2.        For Non-Resident Beneficiaries

·      Understand your local tax obligations: Obtain advice from a qualified tax professional in your country of residence on how distributions from a South African trust will be treated under local law.

·      Investigate foreign tax credit availability: Determine whether any credit is available in your jurisdiction for the South African taxes paid by the trust, and document the basis for any FTC claim.

·      Comply with foreign trust disclosure requirements: Ensure that your interest in the South African trust is properly disclosed to the tax authorities in your country of residence.

·      Be aware of CRS reporting: South African trusts are required to report beneficiary details to SARS under CRS. Your country of residence will likely receive this information automatically. Ensure your tax filings are consistent with information reported by the trust.

·      Consider timing of distributions: In jurisdictions with accumulation/throwback rules, receiving current distributions (rather than accumulated distributions) may be more tax-efficient. Discuss timing with your advisors.

·      Engage both SA and foreign advisors: The complexity of cross-border trust taxation requires specialist advice in both South Africa and your country of residence. The interaction between the two tax systems should be modelled before distributions are made.

5.3.        The Cost-Benefit of Maintaining a South African Trust with Non-Resident Beneficiaries

The amendments to section 25B have fundamentally altered the economics of South

African resident trusts as vehicles for housing assets for the benefit of non-resident

beneficiaries. The increased incidence of trust-level taxation at 45%, together with the

potential loss of conduit treatment, possible foreign tax credit limitations, and

increased compliance obligations, may significantly reduce the tax efficiency of many

structures involving non-resident beneficiaries.

Trustees, advisors, and beneficiaries must honestly assess whether the costs

(including the 45% tax and compliance burdens) are justified by the remaining

benefits of the trust structure, or whether alternative arrangements should be

considered.

6.            Summary and Conclusion

The amendments to section 25B of the Income Tax Act, effective from 1 March

2024, represent one of the most significant changes to South African trust taxation in

recent decades. By abolishing the conduit principle for non-resident beneficiaries,

South Africa has ended the era of South African trusts functioning as tax-neutral

flow-through vehicles for offshore beneficiaries.

The key consequences are:

·      All income vested in non-resident beneficiaries is taxed at the flat trust rate of 45% — regardless of the income's source or the beneficiary's jurisdiction.

·      Income vested in non-resident beneficiaries will generally no longer be taxed directly in their hands for South African income tax purposes. This may limit access to treaty relief and foreign tax credits that may previously have been available, depending on the beneficiary's country of residence and the applicable DTA.

·      The risk of economic double taxation has increased significantly and will depend on whether the beneficiary's country of residence recognises the South African tax paid by the trust and provides foreign tax credit or other relief.

·      Compliance obligations have increased significantly for both South African trustees and non-resident beneficiaries worldwide.

The specific impact on any beneficiary will depend on their country of residence, the

applicable DTA, the nature and source of the trust's income, and how their

home jurisdiction classifies and taxes foreign trust distributions. There is no single

answer applicable to all non-residents — bespoke cross-border analysis is required

in every case.

Given the severity of potential consequences — including 45% SA trust-level tax,

potential additional taxation in the foreign jurisdiction, the loss of DTA benefits, and

significant penalties for non-compliance — early and comprehensive professional

advice from both South African and foreign-jurisdiction specialists is essential.