What Factors Affect How Trusts Are Taxed in South Africa?
In South Africa, trusts are subject to tax under the Income Tax Act, No. 58 of 1962 and the Tax Administration Act, No. 28 of 2011. Trust taxation is distinct from individual and corporate taxation, and the rates and methods of calculation depend on how income and capital gains are handled by the trust.
There are two main scenarios that influence the tax treatment of a trust:
- Income Retained Within the Trust
- Income Distributed to Beneficiaries
Let’s explore these two scenarios in more detail:
1. Income Retained Within the Trust
When a trust retains income (i.e., does not distribute it to beneficiaries), it becomes liable for paying tax on that income. The tax rate for income retained in a trust is significantly higher than the tax rate for individuals. As of the 2024/2025 tax year, the tax rate on income retained by a trust is 45% on any income exceeding R1.73 million.
This high tax rate is designed to encourage trusts to distribute income rather than retain it indefinitely, ensuring that tax is paid on income either by the trust or by the beneficiaries. Holding income within the trust is generally considered less tax-efficient due to this high tax rate.
How to Calculate Tax on Retained Income in the Trust:
- Determine Trust’s Total Income: The trust must first calculate the total income earned during the tax year. This could include interest, rental income, dividends, and other sources of revenue.
- Apply the Tax Rate: If the trust retains income, it is taxed at a flat rate of 45%. However, if the total income does not exceed R1.73 million, the trust may pay a lower amount of tax based on the applicable tax rates.
- File a Tax Return: The trust must file an annual tax return with the South African Revenue Service (SARS), providing details of the income earned and tax liabilities.
2. Income Distributed to Beneficiaries
The second scenario is when a trust distributes its income to beneficiaries. This can be an effective way to reduce the trust’s tax liability since income distributed to beneficiaries is taxed at the beneficiaries’ individual tax rates, which are often lower than the trust’s rate.
When the trust distributes income, the beneficiaries are responsible for declaring that income on their personal tax returns and paying tax accordingly. The applicable individual tax rates for the 2024/2025 tax year are:
- 0% on income up to R237,100
- 18% on income between R237,101 and R370,500
- 26% on income between R370,501 and R512,800
- 31% on income between R512,801 and R673,000
- 36% on income between R673,001 and R857,900
- 39% on income between R857,901 and R1,200,000
- 45% on income above R1,200,000
By distributing income to beneficiaries in lower tax brackets, a trust can effectively reduce its tax burden. For example, if a trust distributes R100,000 to a beneficiary in a lower tax bracket, the beneficiary will pay tax on that amount at their applicable rate, which is likely to be lower than the trust’s 45% tax rate.
Capital Gains Tax (CGT) on Trusts
In addition to income tax, trusts are also subject to Capital Gains Tax (CGT) on the sale or disposal of assets, such as property or investments. CGT applies when the trust realizes a capital gain, which is the difference between the selling price and the purchase price (or the adjusted base cost).
- CGT Rate for Trusts: The CGT rate for trusts is 36%. This is higher than the individual CGT rate of 18%. However, if the trust distributes the capital gain to beneficiaries, the beneficiaries will be subject to CGT at the individual rate of 18%.
Distributing capital gains to beneficiaries can be an advantageous strategy, as it reduces the overall CGT liability for the trust. This makes trusts an effective way to manage capital gains in a tax-efficient manner.
Other Taxes that May Apply to Trusts
- Donations Tax: Donations made to a trust may be subject to donations tax. The donations tax rate is 20% on donations up to R30 million, and 25% on donations above R30 million. However, individuals are allowed an annual exemption of R100,000 for donations made to a trust.
- Estate Duty: When assets are transferred into a trust, the assets are removed from the settlor’s estate, which may reduce the estate duty liability upon the settlor’s death. However, if the settlor retains control over the trust or benefits from it, the assets may still be included in their estate for estate duty purposes.
Important Considerations for Trust Taxation
- Tax Efficiency through Income Distribution
Distributing income and capital gains to beneficiaries is often more tax-efficient than retaining them within the trust. By doing so, the trust can take advantage of the lower tax rates applicable to individual beneficiaries. Trustees should carefully consider the distribution of income each year to ensure the trust is managed in the most tax-efficient way.
- Professional Tax Planning
Trust taxation in South Africa can be complex, and there are many considerations when determining how to structure and manage a trust to minimize tax liabilities. It is essential to engage in proactive tax planning with the help of tax professionals and legal advisors to ensure the trust is compliant with tax laws and operates in the most tax-efficient manner possible.
- Compliance with SARS Regulations
Trusts must comply with South African tax laws by filing annual tax returns and paying the relevant taxes on income, capital gains, and donations. Failure to comply with tax regulations can result in penalties, interest, and other legal consequences.
- Trust Deed Review
The trust deed is a key document that outlines how the trust operates, including how income and capital gains are distributed to beneficiaries. It is important that the trust deed is carefully drafted to ensure that it meets both the settlor’s objectives and the tax requirements.
At Burger Huyser Attorneys, we specialise in trust law and taxation, and our team is here to assist you with setting up a trust, managing its tax obligations, and ensuring compliance with South African tax laws.
If you are considering setting up a trust or need assistance with trust taxation, contact us today for expert advice and assistance in managing your trust’s financial and legal matters.
Contact Burger Huyser Attorneys, and book a consultation.
To speak to one of our experienced attorneys in South Africa for immediate assistance, contact us on the numbers below:
Randburg call 061 516 6878; Roodepoort call 061 516 0091; Sandton call 064 555 3358;  Pretoria call 064 548 4838;
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DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE
