Over the past few years, offshore trusts have become more costly and complex, with many loan structures attracting additional administrative costs, taxable deemed interest charges and adverse cash flows because of the legislation of further anti-avoidance rules.  

In the wake of SARS’ increased lockdown on foreign trusts, their role in the structuring of the foreign financial affairs of South African residents has changed and, consequently, they may no longer be viewed as the only vehicle option for investors to remit funds from South Africa. The global trust environment is also changing with the introduction of the Common Reporting Standards and the resulting Automatic Exchange of Information between various revenue authorities around the world. The original settlement and current beneficial ownership structures of trusts is now in most cases transparent.  

SARS recently introduced detailed disclosure requirements to record all beneficial owners of registered trusts to comply with the Financial Action Task Force (FATF) requirements. From the time of the 2023 annual tax returns submissions, SARS also released additional reporting obligation requirements for trustees. These require trustees to keep up-to-date records of the beneficial ownership of the trusts (including where the Beneficial Ownership is in the form of other legal arrangements or legal entities) and to record (comprehensive) beneficial ownership data with The Master of the High Court.  

The deadline for IT3(t) third-party data returns is 30 September 2024. The IT3(t) shows all amounts vested to the beneficiaries of the trust for a specific year of assessment. These amounts are not limited to income, but also include capital gains and other capital amounts such as repayment of contributions. Considering the recent changes made to trusts, trustees/their tax representatives must now provide more detailed information with regards to beneficial ownership and income and activities (all income sources/nature of the trust’s activities/how these activities align with the trust’s objectives). Detailed supporting documentation is also required to demonstrate compliance including inter alia documents verifying the trust’s financial activities, trust financial statements, resolutions 

Effective from 1 March this year, the Income Tax Act No. 58 of 1962 was amended to limit the flow-through principle. Prior to 1 March, the flow-through principle provided that, if a trust distributed the income to beneficiaries – regardless of their residency – in the same year it was earned, the income could retain its nature and be taxed in the hands of the beneficiary at the beneficiary’s marginal rates of income tax. The post-1 March limitation now provides that the flow-through principle applies only to distributions made to South African tax resident beneficiaries. This means that, to the extent that a non-resident beneficiary has or obtains a vested right to the income received by/accrued to a South African resident trust, the trust (instead of the non-resident beneficiary) will be taxed on the income. This affects foreign trusts where they are beneficiaries of local trusts (and where SARS may not have information on the persons in whom the foreign trusts vest the income). 

SARS and the South African Reserve Bank (SARB) recently announced that they would consider applications by South African trusts to make distributions to offshore trusts, thereby allowing South Africans to externalise funds from their local structure without having to make use of their personal allowances i.e.: distributions from South African trusts to offshore trusts where, previously, individuals would only be able to send assets directly offshore by means of their personal allowances. This means that you can now potentially increase your trust’s investment choices and take advantage of international tax planning schemes. There is a specific process that must be followed to obtain the necessary approvals to remit these funds offshore. It is also imperative that you consider any potential tax implications of making such distributions before doing so, for example, capital gains distributions may be taxable in the hands of the South African trust at its rates and anti-avoidance provisions may also apply. Also, the approval and Excon amendments does pose a significant practical problem. 

All of these factors notwithstanding, foreign trusts still have long-term value for both individuals and families looking to maximise their wealth, protect their assets and or for estate/succession planning as they provide for multi-generational, tax-friendly (generally) asset protection that is protected from both political risk and high market volatility to which the South Africa economy stands exposed.  

It is essential for high-net-worth individuals to reassess and update their investment structures to ensure they align with their original purpose and are correctly positioned to comply with possible future implications that were not present when these structures were first implemented. The evolving tax landscape, increased reporting obligations, and restrictions on the flow-through principle mean that what may have been optimal in the past could now expose high net worth individuals to unforeseen tax liabilities or administrative burdens. Therefore, a review of existing structures is necessary to ensure continued efficiency, compliance, and protection of assets in this changing environment. 

If you have any queries on the above or require any tax advice, please contact: