In August 2023, SARS quietly introduced a game-changing dispensation: South African (“SA”) resident trusts can now distribute directly to offshore beneficiaries, including offshore trusts (subject to approval). This development marks a significant shift in the regulatory landscape, offering families with international structures a rare opportunity to realign their estate planning strategies.
Why This Matters
Historically, distributions from SA trusts to offshore beneficiaries were tightly controlled, often requiring Reserve Bank approval and facing complex compliance hurdles. The new dispensation simplifies this process, provided trustees obtain a manual letter of compliance from SARS, confirming that all tax obligations have been met and the requisite SARB approval is granted.
This is more than a procedural update; it’s a strategic opening for high-net-worth families and fiduciary professionals to future-proof wealth structures in an increasingly globalised environment.
The Strategic Opportunity
The ability to move wealth offshore legally and efficiently invites a deeper question: How were your offshore trusts historically funded?
Many offshore trusts were established using loan funding from SA residents, a common strategy to avoid donations tax at inception. However, this approach often triggers Section 7C of the Income Tax Act, which imposes annual donations tax on low-interest or interest-free loans to trusts.
With SARS now permitting offshore distributions by SA trusts, trustees and advisors should consider:
- Restructuring historical loan arrangements
- Mitigating ongoing Section 7C exposure, which can erode wealth over time and cause cash-flow constraints.
- Aligning trust structures with global best practices for tax efficiency and succession planning.
Even where loans were not deployed to fund offshore Trusts, this dispensation invites families and their Trustees to holistically consider their offshore Trusts, as opportunities exist to fund and externalise wealth from SA in a tax and exchange control efficient manner – prioritising estate and succession planning.
Why Act Now?
This dispensation is not just a compliance update -it’s a planning window. By acting now, you can:
- Reduce income tax on interest or donations tax leakage under Section 7C.
- Enhance global wealth mobility for future generations.
- Position your estate plan to withstand evolving tax and regulatory frameworks.
We include below a case study which showcases how this dispensation could apply to your existing structures:
Mr A set up a family trust in South Africa, holding the shares in his business and various other assets. As time went on and the SA Trust grew in value, Mr A started feeling concerned about the risk of his assets being housed solely in a South African structure, and he explored ways in which to externalise and diversify his asset base – in an effort to protect his assets against political instability in SA and the volatility of the Rand.
Mr A decided to set up an offshore Trust structure in Guernsey, but funding this offshore Trust was tricky as many tax considerations were relevant, and exchange control hurdles were to be overcome. Mr A settled on loaning the funds to the Guernsey Trust, so as not to suffer upfront donations tax consequences in SA (and potential attribution of income back to him in SA). The SA Trust was cash-flow positive, so Mr A decided to loan R50 million from the SA Trust over time. Mr A and his spouse then utilised their annual allowances to remit the funds offshore, structured as a US Dollar-based loan to their Guernsey Trust.
Over time, the impact of section 7C became concerning to Mr A. SARS require the R50 million loan to attract an appropriate rate of interest, which for a US Dollar-based loan is the base lending rate (currently 7%) plus 1. We include below the tax impact on Mr A (whereby our calculations are based on a R50 million loan, and excludes consideration of annual interest and donation exemption):
- Where interest is actually charged, this meant that interest income of R4 million is to be included in Mr A’s SA tax return annually – resulting in an annual tax bill of up to R1,8 million on such interest!
- Where interest is not charged on the loan, section 7C applies and donations tax of 20% is levied on the deemed interest that should have been charged – resulting in an annual tax bill of up to R800 000 on such deemed interest! Mr A was also advised that this deemed donation of the interest foregone triggers attribution of further trust income in his hands.
Another headache for Mr A was the diminishing Rand, which meant that the ZAR value of the loan kept growing – accompanied by a growing tax bill on deemed or actual interest.
From the above – it is evident that the annual and ongoing tax implications of loans to Trusts can be crippling.
Mr A approached our team, and we assisted in the effective restructure of the loans, saving Mr A the annual tax bill relating to actual or deemed interest. Guernsey Trust repaid Mr A the loan, whereafter Mr A repaid his loan from SA Trust. SA Trust was then sitting on cash which Mr A ultimately wanted to remain offshore – and to achieve this, a local to offshore Trust-to-Trust distribution application was submitted, allowing the SA Trust to flow funds directly to Guernsey Trust (as capital).
No more annual tax costs in SA. The asset is based offshore and protected.
Next steps:
We would recommend that you explore ways in which the dispensation could be beneficial to you and your family. Arro can assist you in:
- Navigating SARS’ approval process for offshore distributions;
- Designing bespoke tax-efficient restructuring strategies for local and offshore trusts; and
- Ensuring compliance while optimising wealth transfer across jurisdictions.
Contact us today to unlock these opportunities and safeguard your legacy: www.arro.co.za
