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Understanding Dividend Taxation for South African Trusts and Beneficiaries
- 02 October 2023
- Trusts
- Theo Burrows
When it comes to the taxation of dividends received by South African trusts and subsequently distributed to South African beneficiaries, there are important factors to consider. This article aims to provide an overview of the tax treatment in such cases.
What is a Dividend?
A dividend is any payment made by a company for the benefit of a shareholder in relation to their shares in that company. It is important to note that dividends do not include the return of contributed tax capital, which refers to the consideration received by a company for the issuance of shares.
Dividend Withholding Tax (DWT)
Dividends are subject to Dividend Withholding Tax (DWT) in South Africa. The current DWT rate is set at 20%. Generally, it is the responsibility of the company distributing the dividend to deduct and remit the DWT.
Tax Treatment for South African Trusts
When a trust holds shares and receives dividends, dividends tax is typically applicable under section 64E (1) of the Income Tax Act No. 58 of 1962. The responsibility for paying dividends tax falls on the "beneficial owner" of the dividend, as defined in section 64EA(a) of the Act.
Types of Trusts and Beneficiaries
Bewind Trust: In this type of trust, the beneficiary is considered the true owner of the trust assets. Therefore, if a dividend is received for the shares held within the trust, the beneficiary is recognized as the "beneficial owner" of that dividend, provided they have a legitimate entitlement to it.
Vesting Trust: In a vesting trust, beneficiaries hold a vested right, which means they have an immediate and irrevocable entitlement to dividends, independent of the trustee's discretion. Once the company distributes the dividend, it becomes the property of the beneficiaries.
Discretionary Trust: In a discretionary trust, the trustee retains control over the dividend and has the authority to decide when and how to distribute it to the beneficiaries.
The Conduit Principle
The tax treatment of dividends distributed by trusts follows the "conduit principle." According to this principle, when trustees distribute dividends, they flow through to the beneficiaries, preserving their status as dividends in the hands of the beneficiaries. If the trust promptly distributes the dividend in the same year it is received, no additional tax implications arise for both the trust and the beneficiary.
However, if the trustees fail to distribute the dividend within the same year, the trust is considered the beneficial owner of the dividend. In such cases, the dividend becomes part of the trust's capital and loses its classification as a dividend if vested in any subsequent year of assessment.
Important Considerations
It is essential to note that the information provided in this article is a general overview. The precise tax treatment may vary based on the specific characteristics of the trust and the tax status of the beneficiary.
About the author: Theo Burrows has over three decades of tax experience as an Independent Tax Practitioner and advocates for administrative fairness and equity in taxation. He is the inaugural General Secretary of the SA Tax Practitioners United (SATPU) and a Tax Technical Advisor for The Tax Faculty.