The use of a trust in succession and estate planning offers several advantages. These include continuity, less delay in the distribution of benefits at death, protection of your dependants, estate duty savings, flexibility, protection of your privacy and protection of your assets from potential attack.

In the case of an international trust specifically, among other things, it can help protect your international investments from costs like estate duty, capital gains tax and (if applicable) executor’s fees and / or costs associated with foreign probate. It is, however, important to understand the tax implications of international trusts for South African residents.
 

We recommend seeking professional advice based on your specific situation

While the article below sets out the rules and regulations as simply as possible, the practical application can be quite complex. Our specialist fiduciary team has extensive knowledge and experience of trust structures and stay up to date with all the regulations and the practical impact of these. They will be able to set out the tax consequences to you and we strongly recommend following this up with obtaining tax advice from your tax adviser.

It’s important to understand the tax implications of having an international trust

We always encourage clients to take a global view of their wealth to benefit from access to more opportunities and better risk-return characteristics over time. Fully understand the tax implications of international trusts for South African residents to ensure you make informed decisions that support your investment objectives over the long term.

A The starting point – who is responsible for the tax liability?

B The different tax treatments of funding a trust with a donation versus a loan.

C Tax triggers and the tax impact (donations and interest-free/low-interest loans).

D Applying an interest rate to a loan – what you need to know.

E Reportable arrangements – what they are. and how they affect you and your international trust.

A. The starting point – who is responsible for the tax liability?

The tax liability falls on you as a South African resident, not on the trust.

According to current South African tax legislation, South African resident individuals are taxed in their own hands whenever they are involved with an international trust, whether as a funder or a beneficiary. An international trust is not regarded as a taxpayer in South Africa in its own right, provided the ‘place of effective management’ of the international trust is not in South Africa. This means all trust-related decisions must be taken and implemented by the trustees outside South Africa, including investment-related decisions.

B. The different tax treatments of funding a trust with a donation versus a loan

Whether you fund the trust through a donation or a loan will determine the tax treatment.

C. Tax triggers and the tax impact (donations and interest-free/low-interest loans)

The exact tax liability will be determined by your role in the trust and the tax trigger
 

D. Applying an interest rate to a loan – what you need to know

How to know which interest rate will apply

The interest charged on an interest-bearing loan will be taxed in the South African lender’s hands. To determine the interest rate that will apply, it’s important to understand the difference between ‘an arm’s length rate of interest’ (as required in terms of section 31) and ‘the official rate of interest’ (as required in terms of section 7C).

Since it’s easier to determine the official rate, as shown above, we support using the official rate as the arm’s length rate and applying it to a loan between an individual (as the lender) and a trust (as the borrower). By applying the arm’s length rate of interest (with reference to the official rate) there should therefore be no ‘tax benefit’ or ‘gratuitous disposal’. Accordingly, neither the transfer pricing provisions mentioned in section 31, the attribution provisions, nor section 7C would apply.
 

What to consider when applying an interest rate to a loan to a trust

• The actual interest rate is a function of the currency of the loan.
• Any interest accruing to you as a South African resident will be fully taxable in your hands.
• The loan is an asset for the purposes of calculating estate duty. Therefore, if the interest is capitalised on the loan – that is, the interest is not physically paid – the value of the loan will increase.

What to consider when selecting the currency of the loan

E. Reportable arrangements – what they are and how they affect you and your international trust

What are reportable arrangements?

A reportable arrangement in the context of international trusts is any arrangement that meets the following 2 criteria:
 

All reportable arrangements must be disclosed to SARS

The obligation to disclose a reportable arrangement to the South African Revenue Service (SARS) rests on all participants (as defined in terms of section 34 of the Tax Administration Act No. 28 of 2011), including the promoter. The promoter is the person principally responsible for organising, designing, selling, financing or managing the reportable arrangement. The definition of the word ‘promoter’ is wide and includes the scenario where we as Nedbank Private Wealth advise you as a South African resident on funding an international trust that meets the criteria above.
 

Failure to disclose a reportable arrangement carries heavy fines 

A penalty of R50,000 per month for a participant and R100,000 per month for the promoter for a period of up to 12 months will apply. Where the anticipated tax benefit due to a participant exceeds R5 million, the penalties are doubled and, if it exceeds R10 million, the penalties are trebled.
 

Reportable arrangements do not apply to discretionary international trusts

There are different interpretations of the meaning of ‘beneficial interest’ that is included in the criteria for reportable arrangements. SARS must still provide clarification on the different views. Until then, based on the approach followed in court, our view is that a discretionary interest (which, according to law is a spes, or a hope) is not a ‘beneficial interest’, which means that a reporting obligation does not apply to discretionary international trusts.

This view is supported by the Banking Association of South Africa. Furthermore, when a discretionary beneficiary receives a distribution from an international trust, the beneficiary acquires a ‘personal right’ (not a vested right) to claim the amount, and therefore remains a discretionary beneficiary. As a result, our view is that a reportable arrangement will apply only where the lender has or acquires a ‘vested interest’ in the trust capital or income at the point that the contribution or payment is made.

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