In this Fiduciary Focus newsletter we look at the tax consequences for South African residents with international trusts.
Diversifying your investment portfolio internationally can offer you better risk-return characteristics over time and give you access to opportunities that are not available locally. In fact, we encourage clients to take a global view of their wealth. An international trust can help protect your global investments from costs such as estate duty. It is however important to understand the tax implications of international trusts for South African residents.
The easing of exchange controls has made international investing more accessible
There has been a gradual easing of exchange controls over the past 20 years. In the past, international exposure was mostly gained indirectly (where the proceeds must ultimately be returned to South Africa and paid in rand), in one of two ways:
Today, South African resident individuals can obtain ‘direct’ exposure to international investments using the following exchange control allowances:
In addition to this, the South African Reserve Bank is considering applications submitted on behalf of individuals to obtain permission to employ additional amounts – over and above these amounts – internationally.
South Africans must declare their global income and capital gains for tax purposes
South African residents are taxed on a residence-based system of taxation when investing internationally. This means that no matter where in the world your assets are situated or how they were acquired, you will be taxed on, and obliged to declare, your global income and accruals (capital gains).
You are also liable for estate duty on your international assets
South African residents are, with relatively few exceptions, liable for South African estate duty on their international assets, including assets acquired using the investment allowance facilities. Many South Africans are not aware of this fact, or the impact it can have. Estate duty rates in South Africa are currently at 20%, and these rates may increase even further while the rand depreciates. This means the rand value of international investments for estate duty purposes will likely increase over the years, thereby increasing liability to estate duty.
An international trust can help protect your international investment from estate duty liabilities
In light of this increasing liability, it is important to consider ‘pegging’ the value of the assets in rands for South African estate duty purposes. This can be achieved by setting up an international trust.
In addition to ‘pegging’ the value of the assets in rands, international trusts offer several other advantages:
It is advisable for an international trust to be managed offshore for tax purposes
If the ‘place of effective management’ of the international trust is not in South Africa, then the international trust will not be a taxpayer in its own right. It is therefore advisable to ensure that all trust-related decisions are taken and implemented by the trustees outside of South Africa. This includes all investment-related decisions as well as the implementation of these decisions.
Understanding how donations and loans are taxed is important
An international trust can be settled by way of a donation or a loan. With relatively few exceptions, a donation is taxed at 20%. The first R100 000 of the donation is free of donations tax. It is important to remember that the interest forgone on interest-free loans is treated as a donation and is subject to donations tax. In so far as South African trusts are concerned, this is the result of the recent introduction of section 7C of the Income Tax Act, which we wrote about in a previous edition of Fiduciary Focus. Loans to international trusts that fall into the definition of ‘affected transaction’ are however subject to section 31 of the Income Tax Act (see below).
South African residents are taxed in their own hands when involved with an international 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 it is as a funder and/or beneficiary. This is accomplished in three ways, depending on the role of the South African resident and the nature of the tax trigger:
1. Attribution provisions – triggered by donations (section 7(8) and/or paragraph 72)
2. Conduit principle (section 25B and paragraph 80)
3. Transfer pricing provisions (section 31)
Important considerations when applying an interest rate to a loan
Where interest is actually charged on a loan, the interest charged will be taxed in the South African lender’s hands. Where interest is charged at the official rate of interest there would be no tax benefit or ‘gratuitous disposal’. This means neither the transfer pricing provisions nor the attribution provisions would apply.
The following should be considered when applying an interest rate to such a loan:
Please contact your relationship manager if you have any questions or if you would like to arrange a meeting with a fiduciary specialist for expert advice on international trusts.
Click on the links below to view the other articles online:
Estate planning > read more
Understanding the tax implications of buying a UK residential property
International > read more
The changing regulatory environment – no place to hide
Wills > Read more
Owning assets in a foreign country – is there a need to have a separate will?
Download a printable version of the Fiduciary Focus newsletter
The Fiduciary Focus Newsletter is intended for general information purposes only and should not be construed as tax, legal or accounting advice. This communication is based on our bona fide interpretation of legislation, rules, regulations and publications. Nedbank Private Wealth provides estate and tax planning advice; however, we do not provide tax, legal or accounting advice and you are requested to consult a professional tax advisor or professional in this regard.
What do you think of the new site?