Overview of the tax implications
There is no straightforward, standard rule in advising an RSA beneficiary of the tax implications of a vested right awarded by the trustees of a foreign trust by way of a distribution.
First, you need to enquire whether any of the following circumstances or provisions applied to the trust’s funder:
- The 2002/3 forex and tax amnesty.
- The 2016 special voluntary disclosure programme (SVDP).
- Section 7(8) of the Income Tax Act or para 72 of the Eighth Schedule to the act.
These attribution rules apply to a donation or soft loan.
- Section 31, the transfer-pricing rules pertaining to soft loans.
When none of the above is applicable, often because the funder is deceased, the general principle to be applied is that the offshore trustees should state the nature and composition of a distribution in terms of the following categories:
- Return of original post-tax capital, whether injected into the trust or on which tax was paid by the funder under the circumstances or provisions already listed. (No RSA tax consequences for the beneficiary.)
- Realised capital gains. (CGT levied on beneficiary at an effective 7,5% to 18% rate, dependent upon the applicable marginal tax rate—para 80(3) of the Eighth Schedule.)
- Dividend income. (Foreign dividend tax levied on beneficiary at an effective 20% rate—s 10B.) (Dividend tax relief might be provided under s 10B.)
- Other income, such as interest and rentals. (Income tax levied on beneficiary at 18% to 45% rate, dependent upon the applicable marginal tax rate—s 25B(2A))
The distribution could comprise a combination of these categories.
Beneficiary with no historic contingent right
Section 25B(2A)(a) provides that a distribution from an offshore trust to a beneficiary is taxable if it constituted income on the basis that the trust had been a resident ‘in any previous year of assessment during which that resident had a contingent right to that amount’. As I interpret this rule, if a beneficiary is appointed under a trust only in the current tax year, the beneficiary had no contingent right to any historic amounts. Thus any current distribution would be subject to tax only to the extent itcomprises the current year’s taxable income. It follows, in my view, that any amounts distributed from the trust’s capitalized previous years’ income or capital gains would be received tax-free by the beneficiary.
I hope to explore this view more fully in a future issue.