Proposed Changes to the Tax Treatment of Non-Resident Beneficiaries of Trusts

The income tax provisions governing the tax treatment of amounts vested in beneficiaries of trusts are contained in section 25B of the Income Tax Act and paragraph 80 of the Eighth Schedule to that Act. Section 25B deals with amounts which are not of a capital nature, such as interest income or rental income, whereas paragraph 80 deals with vested capital gains.

Currently capital gains vested in non-resident beneficiaries remain subject to capital gains tax in the trust. The implication is that capital gains vested in non-resident beneficiaries face a higher flat tax rate of 36%, compared to capital gains vested in resident beneficiaries which incur a maximum effective tax rate of 18%.

However, currently a different tax treatment applies to amounts that are not of a capital nature. Non-capital amounts distributed to beneficiaries during a tax year are currently deemed to accrue to a beneficiary and therefore may be subject to tax in the beneficiary’s hands. This treatment applies irrespective of whether the beneficiary is a resident or a non-resident.

Government is concerned by the difference in the income tax treatment of capital gains and non-capital amounts vested in non-resident beneficiaries. The problem identified by Government is that it is more complicated and difficult for SARS to collect and enforce recovery of income tax that should be payable by non-resident beneficiaries.

Given these concerns it has been proposed that section 25B will be amended to align it with paragraph 80 in the above respect. The effect of this amendment would be that ordinary income of trusts which in future is vested in non-resident beneficiaries will remain to be taxed in the trust at a flat rate of 45%. This rate is higher than the tax rates that would ordinarily be faced by non-resident beneficiaries.

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