A question of trust-to-trust

The South African Revenue Service (SARS) along with the South African Reserve Bank (SARB) recently announced that they would consider applications by South African trusts to make distributions to offshore trusts.

Since South African trusts don’t have foreign investment allowances, they are left with few possibilities for gaining offshore investment and diversification exposure. In only limited circumstances with SARB approval, has a South African trust been able to pay funds offshore. Previously, strict rules prevented the transfer of money or assets from South African trusts to offshore trusts, especially where the offshore trust had South African resident beneficiaries.

With the recent announcement, South Africans now can externalise funds from their local structure without having to utilise their personal allowances, allowing for greater flexibility and opportunities for managing trust assets.

This new dispensation allows South African trusts to apply to the SARB for approval to distribute money to offshore trusts. This means that if you have a South African trust, you can, subject to receiving tax clearance and SARB approval, transfer funds to offshore jurisdictions, and thus expand your investment options and potentially benefit from international tax planning strategies.
 

How to obtain the necessary approvals

The process is two-fold. Firstly, the trustees of the South African trust must apply to SARS for tax clearance to remit the funds offshore. This application will involve an in-depth audit of the trust’s tax compliance and the source of funds for the distribution, ensuring strict compliance with the local tax laws. To apply, the following conditions and requirements must be met:

1. The offshore trust must be a beneficiary of the South African trust, falling within the scope of the beneficiary definition.
2. The South African trust instrument must allow for such a distribution; and
3. The South African trust must demonstrate that all tax liabilities related to the distribution have been or will be met (by the SA trust).

If SARS is satisfied with the tax compliance assessment, it will issue what is called a Manual Letter of Compliance. The second step involves an application to the SARB for approval to externalise the funds, which is done through an authorised dealer (such as Investec's excon team).

The SARB has not released a formal circular permitting these transfers. As a result, there are no explicit written regulations governing the permissibility of these trust-to-trust applications. These applications are currently handled on a case-by-case basis. The SARB may impose specific conditions on the approval, such as repatriating distributions by the offshore trust of the funds back to South Africa within 30 days unless upfront approval is obtained by the recipient beneficiary to retain the funds offshore.

This ability to move funds to an offshore trust  is a welcome development, as it creates greater flexibility when it comes to estate planning and diversifying investments through access to international investment opportunities, while still being able to house the assets in a trust. Trusts have many benefits, such as intergenerational wealth protection and management, providing for your children (especially minors), and succession continuity to name but a few.

Previously, individuals would only be able to send assets directly offshore via their personal allowances.

It’s important to consider the potential tax implications of distributing funds from a South African trust to an offshore trust. For instance, income or capital gains distributions may be taxable in the hands of the South African trust at its rates and certain anti-avoidance provisions may potentially apply to prevent tax avoidance. It’s critical that trustees obtain tax advice, before the implementation of a trust-to-trust distribution.

SARS' and SARB’s announcement regarding the movement of funds from South African trusts to offshore trusts signifies a beneficial change in stance on policy. It provides individuals and entities with more flexibility and opportunities to manage their trust assets. However, it's important to comply with the conditions and requirements set by the SARS and the SARB to avoid any penalties or legal issues and to understand the implications that flow from such a distribution before embarking on the application.

For this reason, it’s important to ensure that you consult with experts who are well-versed and equipped to deal with these applications and can navigate you through the process when making the necessary applications. Should you wish to discuss this in more detail, please contact your banker or wealth manager.

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