Tax Treatment of Rental Income Distribution via Trust Structures and Deductibility of Prior Period Expenses

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Tax Treatment of Rental Income Distribution via Trust Structures and Deductibility of Prior Period Expenses

• 17 May 2025
• Trusts
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2026.

Question: 

• Whether the income can be vested as rental income in specie or under another form;
• How to handle retrospective tax registration for beneficiaries; and
• How to recognise prior period rental expenses in the CC for past years to claim allowable deductions.

Answer:

The Problem / Facts

A private company (Pty Ltd), wholly owned by a trust, receives rental income from a close corporation (CC). The trust intends to vest this income to four beneficiaries in order to eliminate taxable income in the trust and to keep the vested amounts below individual tax thresholds. The queries raised concern:

• Whether the income can be vested as rental income in specie or under another form;
• How to handle retrospective tax registration for beneficiaries; and
• How to recognise prior period rental expenses in the CC for past years to claim allowable deductions.

Analysis of the Tax Issues Identified

Distribution of Rental Income: The rental income is received by the Pty Ltd and taxed at the corporate tax rate. Any transfer of funds to the trust would require the declaration of a dividend. Once received by the trust, the dividend may be vested to the beneficiaries. However, the income cannot retain its original character as rental income in specie once it is in the trust—it will be classified as dividend income.

Retrospective Tax Registration: Beneficiaries are required to be registered as taxpayers with SARS in order to declare the vested income. There is a risk of administrative penalties for late registration or submission of returns.

Prior Period Expenses: The CC would need to either correct prior income tax assessments or formally apply to SARS for approval to claim deductions in respect of prior period rental expenses that were not previously accounted for.

List of Tax Issues and Applicable Legislation

• Distribution of Rental Income: Income Tax Act 58 of 1962 – Sections 1, 10(1)(k)(i), and 25B
• Retrospective Tax Registration: Tax Administration Act 28 of 2011 – Sections 22 and 25
• Recognition of Prior Period Expenses: Income Tax Act 58 of 1962 – Sections 11(a) and 23(g); Tax Administration Act 28 of 2011 – Section 99

Applicable Law

• Income Tax Act 58 of 1962: Provides definitions of "gross income", outlines the dividend exemption (Section 10(1)(k)(i)), governs the taxation of trusts (Section 25B), and specifies general deduction provisions (Sections 11(a) and 23(g)).
• Tax Administration Act 28 of 2011: Covers taxpayer registration (Section 22), submission of tax returns (Section 25), and the correction of prior tax assessments (Section 99).

Application of the Law to the Facts

The Pty Ltd must declare a dividend to the trust out of its after-tax rental income. The trust can then vest this amount to the beneficiaries in terms of Section 25B of the Income Tax Act. This income will be taxed in the hands of the beneficiaries and will retain the nature of a dividend, not rental income, when vested within the same tax year it is received by the trust.

Beneficiaries must register as taxpayers with SARS under Section 22 of the Tax Administration Act and declare the vested income in their annual returns. Penalties may apply for late registration or non-compliance.

For the CC’s unclaimed prior period rental expenses, a request must be made to SARS under Section 99 of the Tax Administration Act to revise the relevant assessments. This is subject to prescribed time limits and SARS’s discretion.

 

 

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