Trusts and capital distributions on emigration

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By Marty Santana* 

At a time when SARS is looking at high-net worth individuals and trusts for collection of more tax revenue, a look at the rules that apply to trusts and distributions of capital gains to beneficiaries is crucial, especially considering that many South Africans have or are emigrating and therefore ceasing to be tax resident in South Africa.

Marty Santana

To determine the tax implications of capital distributions to beneficiaries by trusts, it is important to understand whether the distribution is to a beneficiary with a vested interest in the assets of the trust, or whether it is to beneficiaries which has a discretionary right in terms of decisions made by the trustees.

Vested interest trusts

Where capital distributions are made to beneficiaries with a vested interest, the date of disposal of an asset to the beneficiary for capital gains tax purposes is when the beneficiary actually acquires the vested right to the asset, and not when the asset is transferred. For example, a father gives shares to a trust with the sole purpose that the shares must be held in trust until the son, who is a beneficiary of the trust, turns 30 years old. At the time the shares were given to the trust the market value was R2 million. This will be the base cost in the hands of the son as he had a vested interest in these shares. If he decides to emigrate from South Africa soon after turning 30 and the market value at the date of his ceasing residency is R5 million he will have a deemed taxable capital gain of R3 million. If after emigrating there is a sale of the shares at R6 million, the R1 million gain from the date the son ceased tax residency and the date of sale of the share will not be subject to any further capital gains in South Africa.

Discretionary trust

In the case of a discretionary trust, the taxable capital gain cannot be distributed to the beneficiaries but would be taxed in the trust.  Looking at the same example above, in this instance the father gives the shares to a discretionary trust (at a value of R2 million) – this will be the base cost for the trust. Should the son cease tax residency before the shares have been distributed to him (as a beneficiary) by the trustees and the trust sells the shares a year after his leaving at R6 million, there will be a capital gain of R4 million which is fully taxable in the hands of the trust because the son had become a non-resident beneficiary before the shares had been distributed. This means that the capital gain in this case will be taxed at 36%.

Conclusion

When someone is planning to emigrate and is a beneficiary of a trust, it is important to look at the underlying assets in the trust before emigrating and considering the capital gains tax implications of assets held in a Discretionary Trust. Also, someone who is emigrating must ensure that if they have vested rights in a trust that these assets are declared for the exit capital gains charge.

Trustees need to ensure that they are aware of the beneficiaries’ SA tax status when making decisions on distributions of capital gains to beneficiaries as the trust would have a higher tax liability where the beneficiary is non-SA tax resident.

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