Understanding Dividend Taxation for South African Trusts and Beneficiaries

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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.

FAQs

1. How are dividends taxed in a South African trust?

Dividends received by a trust are generally subject to dividends tax at 20%, withheld at source by the company declaring the dividend. However, the tax outcome may differ if the dividend is distributed to a beneficiary, depending on timing and structure.

2. Do South African trusts pay dividends tax?

No, dividends tax is not paid by the trust itself, but by the company declaring the dividend. The trust receives the dividend net of tax, unless it qualifies for an exemption (such as being a public benefit organisation or retirement fund).

3. Can a trust pass dividends to beneficiaries tax-free?

Dividends distributed to beneficiaries retain their tax nature. If the dividend was already subject to dividends tax at source, no further tax applies to the beneficiary. However, proper timing and documentation are critical to ensure this flow-through treatment.

4. When are dividends taxed in the hands of a trust beneficiary?

If the trust distributes a dividend in the same tax year it is received, and the distribution is properly vested in the beneficiary, the dividend may be taxed in the hands of the beneficiary—but only once, as dividends tax is already withheld.

5. Are dividends received by a discretionary trust taxed differently?

Yes. In a discretionary trust, SARS may apply the conduit principle if the trustees exercise discretion to vest the dividend in a beneficiary within the same tax year. If not vested, the dividend is taxed in the trust, after dividend tax is withheld.

6. What is the conduit principle in trust taxation?

The conduit principle allows income received by a trust to be "flowed through" to beneficiaries. If correctly applied, the income retains its original character (e.g. dividend, interest, capital gain) and may affect the beneficiary's tax position, not the trust’s.

7. Is a trust liable for additional tax on dividends distributed to beneficiaries?

No additional tax is imposed on the trust or beneficiary if the dividends tax was already withheld by the company. The key requirement is that the distribution must occur in the same tax year and be properly recorded in the trust’s accounts.

8. Can trusts benefit from dividend tax exemptions?

Some trusts, like public benefit organisations (PBOs) and retirement funds, may qualify for dividends tax exemptions. Standard discretionary or inter vivos trusts typically do not qualify unless specific exemption criteria are met.

9. Do non-resident beneficiaries of a South African trust pay dividends tax?

If the dividend is from a South African company, dividends tax is withheld at 20% before it reaches the non-resident, regardless of whether it is paid to a trust or individual. Tax treaties may reduce this rate if applicable.

10. What records should a trust keep when receiving and distributing dividends?

Trusts must maintain:

• Dividend withholding statements from companies

• Resolutions and trustee minutes showing distributions

• Beneficiary ledgers reflecting vested income

• Evidence of timing and tax year alignment

These records ensure compliance with SARS and proper application of the conduit principle.

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