South Africa: Proposed amendment to taxation of nonresident beneficiaries of trusts

Draft Taxation Laws Amendment Bill, 2023, released on 31 July 2023, would amend the taxation of nonresident beneficiaries of trusts by repealing application of the conduit principle to such beneficiaries.

Currently, the general principle governing the taxation of trusts tax resident in South Africa is that when any beneficiary of a trust has or acquires a vested right to an amount that has been received by or accrued to the trust, that amount is deemed for normal (income) tax purposes to have accrued directly to that beneficiary. Thus, the amount is liable to normal (income) tax in the hands of the beneficiary and not in the hands of the trust. Further, the amount so deemed to have accrued to the beneficiary retains its nature/identity (the "conduit principle”), provided that the amount vested in the beneficiary in the same year of assessment, as the year in which the amount accrued to or was initially received by the trust. 

The application of the conduit principle may, depending on the circumstances, result in the amount being taxed at a lower rate of (or even being completely exempted from) normal (income) tax in the hands of the beneficiary, when compared with the position had the amount been subject to tax in the hands of the trust. For example, if the amount vested in the beneficiary is from foreign dividends received by the trust, the beneficiary of the trust is treated as if the beneficiary received foreign dividends directly. Since nonresidents are only liable to normal (income) tax on amounts accrued or received from a South African source, the amount so vested will not be subject to normal (income) tax in South Africa at all if the beneficiary is nonresident. If the same amount had been taxed in the hands of the trust, absent the application of a specific exemption, the receipt of the foreign dividends would only be partly exempted.

In addition, the South African Revenue Service (SARS) has stated that the flow through of amounts in South African trusts to nonresident beneficiaries places it in a difficult position to collect tax on these amounts, since tax recovery actions against nonresidents are difficult to enforce and SARS is less likely to have information on nonresident trust beneficiaries. 

In response to the above, the proposed amendment would limit application of the conduit principle only to resident beneficiaries. As further justification for the proposed amendment, National Treasury asserts that the proposed amendment would better align the normal (income) tax provisions with the capital gains tax provisions which distinguish the CGT treatment of amounts derived from capital gains determined by a resident trust and vested in resident versus nonresident beneficiaries.

The proposed amendment may lead to (economic) double taxation, as the same amount may now be subject to normal (income) tax in South Africa in the hands of the trust and the nonresident beneficiary may also be subject to tax on the same amount in the beneficiary’s home country. However, the nonresident beneficiary would no longer be able to claim treaty relief in respect of the South African tax suffered by the trust, as it is no longer the same taxpayer who is subject to tax in South Africa and abroad.

The proposed amendment is still in draft form and may change in response to the public comments received. The revised Draft Taxation Laws Amendment Bill, 2023, is expected to be released in early November 2023.
 

Read a September 2023 report [PDF 245 KB] prepared by the KPMG member firm in South Africa