How Are Trusts Taxed in South Africa?

In South Africa, trusts are taxed differently from individuals and companies, and the tax rates that apply can significantly impact the financial strategy of the trust and its beneficiaries. Trusts in South Africa are governed by the Income Tax Act, No. 58 of 1962, and subject to the provisions of the Tax Administration Act, No. 28 of 2011. 

Trusts can be taxed in different ways depending on whether income is retained within the trust or distributed to beneficiaries:

Tax on Income Retained in the Trust

When a trust retains income (does not distribute it to beneficiaries), the trust itself is liable for paying tax on that income. The tax rate for trusts that retain income is 45% on any income exceeding R1.73 million (as of the 2024/2025 tax year).

This flat rate of 45% is relatively high compared to the individual tax rates, which means that trustees often aim to distribute the trust’s income to beneficiaries to reduce the overall tax burden. Holding income within the trust is usually not tax-efficient, as the high tax rate on retained income makes it a less favorable option.

Tax on Income Distributed to Beneficiaries

The tax treatment changes if the trust distributes its income to beneficiaries. When a trust distributes income, the beneficiaries are responsible for paying tax on that income at their individual tax rates, not the trust’s rate.

For example, if a trust distributes R100,000 to a beneficiary, the beneficiary must include that amount in their personal tax return and pay tax on it according to their income tax bracket. The individual tax rates in South Africa are as follows for the 2024/2025 tax year:

  • 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, the trust can lower its overall tax liability, as the income will be taxed at the beneficiaries’ lower tax rates, which are typically more favorable than the flat 45% tax rate applied to trusts retaining income.

Capital Gains Tax (CGT) on Trusts

Capital gains tax (CGT) applies when a trust disposes of assets such as property, shares, or investments and realizes a capital gain. The capital gain is calculated as the difference between the sale price of the asset and its original cost (or the adjusted cost if improvements have been made).

  • CGT Rate for Trusts: Trusts are taxed on capital gains at 36%. This is considerably higher than the CGT rate for individuals, which is 18%.

However, when a trust distributes the capital gains to beneficiaries, the beneficiaries will be liable for CGT at the individual rate of 18%. This makes it more tax-efficient for the trust to distribute capital gains to beneficiaries rather than retaining them within the trust.

Donations Tax and Estate Duty

In addition to income tax and CGT, trusts may also be subject to donations tax and estate duty, depending on the nature of the trust and the assets involved.

  • Donations Tax: Donations made to a trust may trigger donations tax, which is levied at 20% on donations up to R30 million, and 25% on donations exceeding R30 million. However, there is an annual exemption of R100,000 for donations made by an individual to a trust.
  • Estate Duty: When assets are transferred into a trust, they are typically 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 value of those assets may still be included in the settlor’s estate for estate duty purposes.

How to Calculate Tax on Trusts in South Africa

Calculating tax on a trust involves determining the amount of income generated by the trust, whether the income is distributed to beneficiaries, and whether any capital gains are realized by the trust. Here is a simplified process for calculating trust tax:

  1. Determine Trust Income: Calculate the total income earned by the trust during the tax year. This includes income from interest, dividends, rental income, or other sources.
  2. Allocate Income to Beneficiaries: If the trust distributes income to beneficiaries, the income will be taxed in the hands of the beneficiaries at their applicable tax rates. The trust should allocate the income and ensure that beneficiaries report it on their personal tax returns.
  3. Tax on Retained Income: If the trust retains income, it will be taxed at the flat rate of 45% on the income exceeding R1.73 million. The trust must file its tax return and pay the tax owed.
  4. Calculate Capital Gains: If the trust sells assets and realizes capital gains, calculate the capital gain (sale price minus cost) and apply the CGT rate of 36% if the gain is retained within the trust.
  5. Distribute Capital Gains: If the trust distributes the capital gain to beneficiaries, the beneficiaries will pay CGT at the individual rate of 18%.
  6. Report Donations: If the trust receives donations, calculate donations tax at the applicable rates and apply any exemptions. Ensure compliance with donations tax rules.
  7. File the Trust’s Tax Return: The trust must file an annual tax return with the South African Revenue Service (SARS), providing details of income, capital gains, donations, and distributions made to beneficiaries.

Key Considerations for Trust Taxation

  • Tax Efficiency: Distributing income and capital gains to beneficiaries can be a tax-efficient strategy, as it allows the trust to take advantage of the lower tax rates available to individuals.
  • Trust Deed: The trust deed should outline the distribution of income and capital gains, as well as the roles and responsibilities of trustees. This document is crucial for ensuring the trust operates according to the settlor’s wishes and complies with tax laws.
  • Tax Planning: Trusts require careful tax planning to minimize the tax liability for both the trust and its beneficiaries. Trustees should regularly review the financial status of the trust and consider strategies for distributing income and capital gains effectively.
  • Compliance with SARS: The trust must adhere to all SARS tax regulations, ensuring that tax returns are filed on time and that all tax obligations are met. Non-compliance can result in penalties and interest.

While trusts that retain income are taxed at a high rate of 45%, distributing income and capital gains to beneficiaries can significantly reduce the tax burden by taking advantage of their individual tax rates.

Understanding the tax rates and calculations is essential for effective trust management and financial planning. At Burger Huyser Attorneys, we specialise in trust law and taxation, helping you navigate the complexities of trust taxation and ensuring that your trust is structured in the most tax-efficient way possible.

Contact us today for personalised legal advice and assistance in managing the taxation of your trust in South Africa.

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;

Centurion call 061 516 7117; Alberton call 061 515 4699; Bedfordview call 061 536 3223

DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE