Section 25B of the Income Tax Act governs the taxation of income in trusts and their beneficiaries. Specifically, subsections 25B(1) and 25B(2) apply to income received or accrued by resident beneficiaries. For non-resident beneficiaries, unless section 7(8) applies, the income must be taxed in the trust.
Section 25B(1): Vested Rights of Resident Beneficiaries
Income received by or accrued to a trustee for the immediate or future benefit of a resident beneficiary with a vested right to such income is deemed to be income accrued to that beneficiary.
If no such vested right exists, the income is deemed to accrue to the trust itself.
Section 25B(2): Discretionary Rights of Resident Beneficiaries
Where a resident beneficiary acquires a vested right due to the trustee’s exercise of discretion − as conferred by the trust deed or will − that amount is taxable in the hands of the beneficiary.
This section adheres to the accrual principle for resident beneficiaries.
Thus, in terms of sections 25B(1) and 25B(2), the ‘flow-through’ principle only applies to resident beneficiaries. This means that all amounts vested
to non-resident beneficiaries are subject to tax in the hands of the trust.
Section 25B is, however, subject to section 7; thus, section 7 has to also be considered.
Section 7(8): Income Received or Accrued to a Non-Resident
Section 7(8) deems any amount received by or accrued to a non-resident − as a result of a donation, settlement, or other disposition made by a resident −
to be the income of the resident, provided that the amount would have been included in the non-resident’s income had they been a resident.
For Section 7(8) to apply:
- A resident must make the donation, settlement, or disposition.
- Income must be received by or accrue to a non-resident.
Importantly, the Act defines the recipient broadly: the non-resident may be an individual, company, close corporation (CC), or trust.
Tax advice
Effective from 1 March 2024, the Income Tax Act was amended to limit the ‘flow-through’ principle only to distributions made to South African tax resident beneficiaries. This change was to align the income tax treatment with capital gains tax treatment in paragraph 80 of the Eighth Schedule. The reason for the change advanced by National Treasury is primarily due to the flow-through of amounts from South African trusts to non-resident beneficiaries. This creates challenges for SARS in collecting income tax.
Sections 25B(1) and 25B(2) apply only to resident beneficiaries. For non-resident beneficiaries, unless section 7(8) applies, always tax the income in the trust.
Dr Muneer Hassan, CA(SA)
Chartered Tax Advisor (CTA), Deputy HOD Accountancy and Senior Lecturer Taxation at UJ, Lecturer on the Gauteng Board Course, and Deputy Chair of SAICA National Tax Committee
