Once South Africans have settled abroad, their thoughts often turn to how they can easily access their South African money. For many expats who have left the country on a permanent basis, these funds are often tied up in a trust.
This is largely because trusts are a popular vehicle for South Africans to hold investments in property and private companies. So if you are living abroad, and a beneficiary of a South African trust, you might be asking yourself if you should financially emigrate and what needs to be considered.
Your annual exchange control allowances
If you possess a South African green barcoded ID or smartcard, you don’t need to go the emigration route, provided the funds you wish to access fall within your annual allowances to transfer money out of South Africa. The two allowances you currently have access to are your Standard Discretionary allowance of R1m and a Foreign Investment Allowance of R10m (a personal tax clearance is required for this). As an individual, you therefore are able to transfer R11m out of South Africa on an annual basis.
Requesting a “special allowance”
There is also the option of a “special allowance” where you can request to transfer amounts above your annual allowances out of South Africa. This will be considered by SARS based on the merit of the application, however SARS will conduct a full tax audit of the trust, any entities linked to the trust, and your own personal tax affairs before your tax clearance is issued.
When financial emigration makes financial sense
Financial emigration is also known as formal emigration and simply means your status, for exchange control purposes with the South African Reserve Bank, changes from resident to non-resident. Financial emigration does not change your status as a South African. You and your family still have the right to South African citizenship and your South African passports.
You can use your annual allowances to transfer distributions from a trust on an annual basis, however if you expect distributions from the trust in perpetuity, it makes sense to consider the financial emigration route.
If you are not in possession of a South African green bar-coded ID or smartcard, financial emigration is your only option to transfer distributions from a trust offshore. In order to financially emigrate you need to apply to both SARS and the South African Reserve Bank (SARB) to approve your application.
If you are a beneficiary of a trust, SARB will be considering the following:
- If the FUNDER – not the Donor, is still alive at the date of the emigration application
- Whether such person is the applicant (i.e. is the trust your own or a third-party funded trust
- Who the beneficiaries are and what their respective emigration statuses are
- The nature of the funds distributed – whether they are income or capital
Income versus capital
Any income distributions will be transferrable from the trust. The first transfer requires SARB approval and the subsequent transfers will only require an application and submission to the authorised dealer (bank).
In the case of capital, the funder will be the person that funded the capital of the trust in the form of loans, donations or otherwise.
If the funder is the applicant for financial emigration and the trust is an own-funded trust, the capital may be transferred. If it is a third party funded trust and the funder is still alive, the capital of the trust is “blocked” (for exchange control purposes) and cannot be distributed to beneficiaries offshore.
It is important to note that for any capital distribution from a trust, that a special application must be submitted to SARB for approval. Once a trust forms part of a financial emigration application submitted to SARB, any changes related to that trust, e.g. its beneficiaries, its trustees, its accountants or the trust deed, must be reported to and approved by SARB.
In addition to the above, it is also a requirement set by SARB, in terms of their regulations, that 2/3rds of trustees of a trust must reside within South Africa.
The tax implications
The tax impact of your tax residency status must be considered. The proposed changes by the Davis Tax Committee regarding the abolition of the trust conduit principle were proposed but have not been approved yet. Currently, this means that any distributions regarding capital gains tax to a non-resident is taxed either in the trust or the beneficiary is taxed in their own name. Should the proposed changes be accepted however, the flow through will disappear and all taxes will be paid within the trust.
If you are living abroad or are planning to leave South Africa and your finances are tied up in a trust, it is essential that you make well informed decisions to ensure the free-flow of any distributions made from your South African-held trusts.