Taxation in South Africa - Implication for QROPS pension transfer

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Tax treatment of benefits received by the member

• The funds/assets will not be subject to income tax or capital gains tax until the trustees decide to make a distribution/benefit payment to the member or to vest the funds/assets in the member.
• Annuities received by a resident member will be taxable in full in the member's hands regardless of whether the annuity is paid out of capital, interest or dividends.
• If the benefit received is capital distributed out of the original capital contributed by the member, the capital amount will be entirely free of tax.
• If the benefit received is capital distributed out of capital gains that arose from the disposal of trust assets, only 25% (being the inclusion rate for natural person) of the capital gain will be subject to tax at the member's effective rate of tax which varies between 0% and 40%. The effective tax rate on the capital gain will therefore vary between 0% and 10%.
• Any successive beneficiaries who are South African residents will also be taxable on capital distributed out of capital gains that arose from the disposal of trust assets prior to the date that the South African resident successive beneficiaries became beneficiaries of the trust. The beneficiary will be taxed on only 25% of the capital gain at the beneficiaries’ effective rate of tax.
• If the benefit received is capital distributed out of capitalised income (i.e. income earned by the Trust in one year and distributed in a subsequent year), the capital amount will be taxed in full as income in the member's hands. This tax implication applies in respect of income earned by the trust during the period the member was a discretionary beneficiary of the trust.
• Where the capitalisation of interest takes place within a roll up fund (which does not have the intention to declare dividends and income received on the investments will be accumulated and reinvested in assets of the Fund) it will be treated as capital.
• If trust income is distributed to the member in the year earned by the trust, the amount received will be taxed in full as income in the member's hands.
• Where a new trust has been created on the death of a member (or some other pre-determined event), the appointed member of the new trust if South African tax resident, will be taxed on capital distributed out of any capital gain that arises in the new trust from the disposal of assets by the new trust.. The appointed member if South African tax resident, will be taxed on only 25% of the capital gain at the appointed member's effective tax rate.
• Under current legislation it is anticipated that the distribution of capitalised capital gains by the new trust, which the new trust obtained as a part of a distribution by another trust, will not be taxable in the hands of the appointed member of the new trust.

Donations Tax

• Donations tax will not be payable in respect of the contributions made by a member to the Trust because such contributions do not constitute donations for donations tax purposes, i.e. the contribution is not a gratuitous disposal of property.
• Property distributed to a member in terms of the deed of trust will be exempt from donations tax.

Positions on the death of the member

• If on the death of the member the assets are distributed to beneficiaries in accordance with the member's letter of wishes the South African resident beneficiaries (not the trust) will be subject to CGT on any gains on the date of distribution

Under current legislation it is anticipated that if in accordance with the member's letter of wishes the trustees appoint a new trust(s) as a beneficiary and the assets and capitalized income and capital gains are transferred to that trust, which in turn has an appointed member who will provide a letter of wishes then there is no CGT charge on the transfer of the assets and capitalised income and capital gains. The base cost of the assets for future CGT purposes will be the market value on the date of the distribution of the asset by the first trust. If however in accordance with the member’s letter of wishes the assets are left in the existing trust for nominated members the value of the assets for future CGT purposes will be the original cost. Therefore unless the value of the assets is less than the original cost or the growth is marginal CGT will be mitigated by establishing a new trust(s).

Estate duty

• The ownership in the assets contributed under the Plan will be transferred to the Trust.
• Assets owned by the Trust at the date of the member's death will not form part of his or her estate for estate duty purposes.
• Trust assets that vest in the member prior to death will be subject to estate duty
• The value of an annuity that has come into payment will constitute property in the member's estate and will be subject to estate duty.

Defined benefit age

• In terms of the Plan's trust deed and rules it is stated that a benefit must be taken before the member’s 90^th birthday. The Trustees will declare some level of benefit for the member at that date, should not have been taken earlier. The Trustees can declare a benefit at any date.
• A member will not incur liability for tax before the trustees declare a benefit date. The member will incur tax liability only in respect of benefit amounts that are received by or accrue to or vest in the member on the basis outlined above.