The residency of a trust is determined, among others, by the residency of the trustees, the place where the trust was established/formed, and from where the day-to-day management of the trust’s operations are carried on. This will depend on any double-taxation agreements and intricate sections of the tax legislation that have to be read together.
In terms of the “conduit principle”, the source of income earned by a trust flows through to the beneficiary in the same nature in which it was earned by the trust.
Section 25B (2A) of the Income Tax Act provides that the income in a trust retains its nature and will, in most cases, be taxed in the hands of a donor or beneficiary.
A resident who acquires a vested right to any capital of a non-resident trust during a year of assessment is required to include that amount in his or her income for that year. The inclusion applies in respect of capital that consists of, or is derived from, receipts or accruals that would have constituted income of the trust if it had been a resident trust during any year of assessment in which the resident had a contingent right to that amount, and the amounts have not already been subject to tax in South Africa.
The anti-avoidance provision in section 25B (2A) can be triggered when an asset of a non-resident trust vests in a resident beneficiary. This will be the case if the asset was financed with foreign income that has not yet been subject to tax in South Africa. The capital gain relating to the vesting of the asset will be dealt with in terms of paragraph 80 of the Eighth Schedule to the Income Tax Act.
Therefore, if a non-resident trust sells an asset that is not subject to the Eighth Schedule, but would have been subject to capital gains tax if the trust had been a resident, the gain will be taxed in South Africa when a resident beneficiary receives an interest in that capital gain.
There is no escaping the grips and the reach of the Income Tax Act if you are a South African tax resident and/or a “temporary resident”. Trusts by their nature are contractual agreements, and have to be understood and entered into with due care and advice. They are complex, and what you think you understand as to the working of a trust usually does not even scratch the surface of the complexities in terms of the administration thereof.
There are no quick fixes in terms of tax planning; there are no miracle cures; and the consequences of getting it wrong can be onerous. And then there are “scam” trusts and alter ego trusts. And that is something that I would not even wish upon my worst enemy.
Seek the advice of qualified specialists when planning your tax affairs - and do not accept one-dimensional answers to complex problems.
There is a lot to be said for the old saying, “keep it simple stupid”. If you want it simple, don't structure it. If you want to structure something, do it properly. You wouldn't build your house without solid foundations, but I am always amazed by how people are willing to “plan” their financial affairs without any solid foundations.
Fair enough, there have been the wonder kids on the block but they are a handful among billions. Please seek proper advice from properly qualified specialists.
Willem Oberholzer, CA (SA), MCom Tax, is executive director and Jade Els, CA (SA), MCom Tax, is a tax adviser at Probity Advisory.