Taxation of Trusts Simplified
Trusts are powerful tools for estate planning, asset protection, and tax efficiency—but only if they’re structured and managed correctly. Many South Africans set up trusts believing they offer automatic tax savings, only to find themselves facing unexpected tax liabilities, compliance burdens, or even penalties from SARS.
For accountants and tax practitioners, understanding how trusts are taxed and who ultimately carries the tax burden is essential. With recent legislative changes, including higher tax burdens on non-resident beneficiaries and stricter attribution rules, now is the time to reassess trust structures and ensure they’re still working as intended.
This article will break down the taxation of trusts in plain, practical terms—from how different types of trusts are taxed, to who pays tax on trust income and how to minimize unnecessary tax liabilities. By the end, you’ll have a clearer understanding of when a trust makes sense, how to avoid common tax pitfalls, and how to guide your clients in structuring their trusts for maximum tax efficiency.
Understanding Trusts and Their Structure
What is a Trust?
A trust is not a separate legal entity like a company but rather a contractual arrangement between different parties. Trusts are governed by common law and the Trust Property Control Act, which primarily regulates the role of trustees. The purpose of a trust is to manage assets for the benefit of beneficiaries. A trust must have a clear purpose; otherwise, it may not be recognized as a valid trust.
Key Parties
Founder/Donor/Lender – The person who establishes the trust and contributes assets.
Trustees – Manage trust assets on behalf of beneficiaries, following the rules set in the trust deed.
Beneficiaries – Individuals or entities that benefit from the trust's income and/or assets.
Independent Trustee – A non-family member appointed to ensure objective decision-making (required for most trusts).
Does a Trust Need a Bank Account?
There is no law requiring trusts to have a bank account. However, if a trust earns income (e.g., rent, dividends), having a separate bank account is critical to ensure transparency and compliance. For example, if a trust owns a rental property that generates R20,000 per month in rental income, this income should be deposited into the trust bank account, not the trustee’s personal bank account to avoid tax complications that can lead to non-compliance and penalties.
Types of Trusts and Their Tax Implications
Inter Vivos versus Testamentary Trusts
Inter Vivos Trusts are created while the founder is still alive.
Mortis Causa (Testamentary) Trusts are created through a person’s will and only comes into effect after their death.
Discretionary versus Vested Trusts
Discretionary Trust is where the trustees decide when and how to distribute assets to beneficiaries.
Vested Trust is where the assets or income belong to specific beneficiaries from the start.
Example 1:
A father creates a discretionary trust and transfers R2 million into it. The trustees decide every year whether and how much income to distribute to his children.
If this were a vested trust, each child would automatically own a portion of the trust's income and assets, and tax consequences would apply accordingly.
Special versus Ordinary Trusts
Tax law refers to special and ordinary trusts. Special trusts are used for minors or people with disabilities
Special Trusts are taxed like an individual (using progressive tax rates from 18% to 45%) and apply a lower CGT rate (same as individuals).
Ordinary Trusts are taxed at a flat rate of 45%, have higher CGT inclusion rate (36%) and do not qualify for tax rebates or exemptions (i.e. interest exemption).
Example 2:
If a trust makes R500,000 in taxable income:
• If it’s a special trust, tax could be R117,507 (as per 2024 individual tax tables).
• If it’s an ordinary trust, tax is R225,000 (45%).
Taxation of Trusts – Who Pays Tax?
How Trust Income is Taxed - Section 25B
When a trust earns income, there are three possible tax outcomes:
If a trust receives income and keeps it (the income is not vested), the trust pays tax at 45%.
The beneficiary is taxed on the income (if the beneficiary has vested right to the income) at their marginal tax rate
The founder/donor is taxed on the income (if Section 7 donor attribution rules apply).
Example 3:
A discretionary trust earns R1 million in rental income.
If the trustees keep the money in the trust → The trust is taxed at 45% (R450,000 tax).
If the trustees vest the income in a beneficiary → The beneficiary pays tax at their marginal rate (e.g., 36% = R360,000 tax).
Donor’s Pay Tax When Attribution Rules - Section 7 of the Income Tax Act Applies
Section 7 prevents tax avoidance by donors shifting income to lower-taxed beneficiaries. When certain conditions are apply, the tax burden reverts back onto the donor, the person who transferred assets into the trust.
Subsections provide for different scenerios, including:
Section 7(2): Income from donated assets is taxed in the donor’s hands.
Section 7(3): If a parent donates to a minor child, the parent is taxed on the income. (see example 4)
Section 7(5): If the trust retains income and there is a condition delaying distribution, the donor is taxed.
Section 7(6): If the donor keeps control over the asset, they are taxed.
Section 7(7): If the donor donates income but keeps the asset, they are taxed.
Section 7C applies when a person lends money to a trust without charging a market-related interest rate. In this case the foregone interest is treated as a deemed donation, which may be subject to donations tax (see example 5).
Example 4. (Donor Attribution Rule – Section 7(3))
A father gives shares to a trust that earns R500,000 in dividends.
If the trust keeps the income → Trust pays 45% tax (R225,000).
If the trust vests the income in the father’s minor child, Section 7(3) applies → Father pays tax instead at his marginal tax rate - e.g., 36% = R180,000.
Example 5. (Donor provided interest free loan, section 7C)
If the donor provided a loan to a trust without charging market-related interest, SARS can attribute the tax liability back to them. A donor loans R4 million to a trust interest-free. Section 7C deems the interest that is not levied or charged on an interest-free loan, as a deemed donation on the last day of each tax year. In this case, SARS will deem the difference between the market interest rate (8.5%) and 0% as a donation. It will have the following tax consequences for the donor:
The deemed interest is R340,000 per year (4,000,000*8.5%)
Donations tax (20%) on R340,000 = R68,000 per year (remember that the annual exemption of R100,000 may reduce this amount)
This tax continues every year until the loan is repaid.
Practical Considerations for Trusts
What Assets Should a Trust Hold?
Assets that appreciate significantly (e.g., property, shares).
Passive income-generating assets (e.g., rental properties).
Assets intended for multi-generational wealth protection.
What Assets Should a Trust NOT Hold?
Business assets (high-risk exposure).
Depreciating assets (e.g., vehicles).
Primary residences (loss of CGT primary residence exclusion).
Timing and Planning Considerations
Vesting decisions should be made before year-end to ensure correct tax treatment.
Provisional tax deadlines must be factored in when deciding on trust distributions.
Loan accounts should be gradually repaid to avoid excessive Section 7C tax.
Example 6.
A trust owns shares in a company, which is expected to pay a R2 million dividend in February. If the trustees vest the dividend in January, the beneficiaries can benefit from lower tax rates compared to the trust’s 45% rate.
Key Takeaways
Trusts are valuable tools for estate planning, but their tax treatment is complex and requires careful planning. Recent changes in South African trust taxation, especially the higher tax burden on non-resident beneficiaries and attribution rules, mean accountants must review their clients’ trust structures regularly.
Always remember:
Trusts pay a flat tax of 45%, but this can be avoided if income is vested to beneficiaries or donors.
Donors must be careful about interest-free loans to avoid excessive tax penalties.
Proper timing of trustee decisions can save significant amounts in tax.
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What you will learn
This webinar is designed to give tax practitioners and other professionals a working understanding of trusts and the tax provisions, with practical tools and ideas to address the various risks and pitfalls, fining the most tax efficient way to manage and structure trusts. Getting it wrong is very costly and difficult to fix later.
The session will look at the typical trust structure issues, such as the loan account that is used to get assets into a trust, and consider alternative means to address these issues. The session will also address common errors that could cost the taxpayer more than double in taxes.