There is parlance often bandied about regarding trusts and tax rules, which, although understood by specialists, is confusing and difficult to follow. Attribution is one such term that is often used and little understood. In simple terms, attribution refers to giving credit or assigning responsibility for something to a particular person, source, or cause.
So, how does that apply to the world of trusts?
Trust income and capital gains are not always taxed in the trust itself. Depending on the circumstances, the tax liability may arise in the hands of the trust, a beneficiary, or the person who contributed the assets or value to the trust (the donor or settlor). The rules governing this outcome are called the attribution rules. They are particularly important when trusts involve South African (SA) and non-resident donors, beneficiaries or assets.
The principal provisions are contained in sections 7 and 25B of the Income Tax Act 58 of 1962, while the attribution of capital gains is dealt with principally in paragraphs 68 to 72 and paragraph 80 of the Eighth Schedule. In March 2026, changes were made which are especially important when a beneficiary lives outside SA.
It is also important to distinguish between loans to trusts and donations to trusts (this is not covered in this article, which relates primarily to the attribution rules and their impact on trusts).
1. The basic principle: Section 25B
Section 25B provides the starting framework for determining the taxation of income received by or accrued to a trust.
As a starting rule, if the trustees give a beneficiary an unconditional right to income during the same tax year, that income may, subject to the provisions of section 7, be taxed in that beneficiary’s hands. If no beneficiary receives that right, the trust will usually pay the tax.
This is called the conduit or flow-through principle, under which the income “flows through” the trust to a beneficiary for tax purposes.
However, section 25B must be read together with section 7. The vesting of income in a beneficiary does not, by itself, determine who is liable for the tax. Where the requirements of Section 7 are met, the relevant income may instead be attributed to the person who funded the trust (the donor).
In short, the tax may be paid by the donor, a beneficiary, or the trust. If an ordinary trust is taxed directly, it is currently taxed at a flat rate of 45%.
2. Attribution back to the donor: Section 7
Section 7 is an anti-avoidance rule. The provisions are designed, among other things, to prevent a taxpayer from transferring assets or income-producing capacity to another person while retaining the financial benefit or otherwise using the transaction to shift the associated tax liability.
It may apply when income arises because someone made a donation, settlement or other transfer of value, e.g. a loan to a trust.
For example, where a person transfers an investment to a trust and that investment subsequently generates income. If section 7 applies, that person may still have to pay tax on the income, even if the trustees subsequently vest the income in a beneficiary.
Particularly relevant are sections 7(2) to 7(8).
These rules cover several situations, including transfers that benefit a spouse or minor child, transfers that can be reversed or are subject to conditions, and transfers involving people or trusts outside SA.
The term “donation, settlement or other disposition” is broad because it extends beyond a conventional cash or asset donation. Depending on the circumstances, it can include more than a simple gift. For example, an arrangement that moves value or the ability to earn income without the trust paying a proper market price.
3. Offshore trusts: Section 7(8)
Section 7(8) is particularly relevant where a SA resident donor makes a donation, settlement or other disposition to a non-resident (offshore) trust.
Broadly, if a SA tax resident transfers assets or value to an offshore trust and that transfer produces income for a non-resident trust, section 7(8) may treat some or all of that income as received by or accrued to the SA resident donor.
The rule is intended to stop SA residents from moving income-producing assets into foreign trusts simply to keep the income outside the SA tax system. The South African Revenue Service (SARS) has specifically described section 7(8) as an anti-avoidance measure aimed at preventing SA taxpayers from artificially shifting assets offshore through foreign trusts.
This rule can therefore produce a very different result from the ordinary trust flow-through principle.
For example, assume a SA resident contributes R10mn to a discretionary trust established in Guernsey. If the trust earns R1mn in interest and the requirements of section 7(8) apply, the relevant part of that interest may be taxed in the SA donor’s hands even though the donor did not receive it.
4. The interaction between sections 7(8) and 25B
The position becomes more complex when an offshore trust earns income because of a SA resident’s contribution and then allocates that income to a SA beneficiary.
SARS Interpretation Note 114 addresses the interaction between section 25B(1) and section 7(8). It concludes that, where the provisions conflict, section 7(8) takes priority over section 25B(1) in the situations covered by the note. The result may be that the donor pays the tax instead of the beneficiary.
The residence of the donor, trust and beneficiary must consequently be considered separately.
5. The major recent change: Non-resident beneficiaries
A particularly significant change occurred from 1 March 2025. Section 25B was amended to limit the flow-through principle only to SA resident beneficiaries. As a result, income and capital gains vested in non-resident beneficiaries are generally taxed in the trust rather than flowing through to those beneficiaries.
This has important consequences for SA trusts with beneficiaries who live outside SA.
Before the amendment, income could sometimes flow through a SA trust to a non-resident beneficiary for tax purposes. That option is now much more limited. For example, where a SA trust earns income and allocates it to a non-resident beneficiary, the trust may still remain liable for the SA tax on that income, subject to the application of the legislation.
This is particularly relevant to family structures involving beneficiaries who have emigrated from SA.
6. Further clarification from 1 March 2026
The 2026 amendments go further. From 1 March 2026, the law makes the order of the rules clearer: income allocated to a SA resident beneficiary may be taxed in that beneficiary’s hands; income allocated to a non-resident beneficiary is taxed in the trust; and where section 7 applies, the relevant income may instead be taxed in the donor’s hands.
An important related amendment concerns section 7(5).
From 1 March 2026, section 7(5) recognises a donor’s change of tax residence as an event that may stop income from continuing to be treated as the donor’s income. Where a donor ceases to be a SA tax resident, income will no longer be deemed to have accrued to that donor under the relevant section 7(5) attribution mechanism, even if the underlying condition or event has not otherwise occurred.
This is potentially significant in emigration and offshore restructuring situations, although the precise tax consequences will depend on the facts and the provisions applicable to the trust and its assets.
7. Capital gains have a separate attribution regime
The attribution rules of ordinary income and capital gains are dealt with under separate provisions. A capital gain usually arises when an asset is sold or otherwise disposed of for more than its base cost.
Paragraphs 68 to 72 of the Eighth Schedule contain provisions that can attribute capital gain back to a SA resident donor in certain cases. Paragraph 72 is especially important where a capital gain arising in a trust is connected to a donation, settlement or other disposition by a SA resident and the gain accrues to a non-resident.
SARS’s trust guidance expressly identifies paragraph 72 as the rule dealing with capital gains vesting in non-residents.
Paragraph 80 generally deals with SA resident beneficiaries. If a trust sells an asset and gives a resident beneficiary a fixed right to an amount from the gain, the gain may be taxed in that beneficiary’s hands.
Thus, SA capital gains tax (CGT) consequences may apply even where the underlying asset is situated outside SA, particularly where the attribution provisions apply.
8. Why the distinction between local and offshore trusts matters
The residence of the trust is an important component of the analysis, but it is not determinative on its own. A SA resident trust is generally subject to SA tax on its worldwide income and capital gains.
An offshore trust is usually treated as a non-resident for SA tax. However, this can change depending on where the trust is actually managed and whether a double-tax agreement applies.
However, the non-resident status of the trust does not necessarily prevent SA taxation.
Even if the trust is offshore, SA tax can still arise in three main ways:
- The offshore trust itself may be subject to SA tax on SA-source income or SA assets.
- The SA donor may be taxed under section 7, including section 7(8).
- A resident beneficiary may be taxed under section 25B or paragraph 80, subject to the specific attribution provisions.
The residence of the trust is therefore only one component of the overall tax analysis.
9. Practical implications of attribution
For SA families with offshore trusts, each contribution, investment return, sale and distribution should be reviewed separately. Simply establishing that a trust is “offshore” does not determine who will ultimately bear the SA tax liability. The 2025 amendments, together with the further 2026 amendments, make this transaction-by-transaction analysis particularly important.
Conclusion
The attribution rules are designed to stop people from using trusts, especially offshore trusts, to separate ownership of an asset from the tax on the income or profit that the asset produces.
The key principle is that the person who legally owns the asset is not always the person who must pay the tax. The tax outcome depends on where the trust, donor and beneficiaries are tax resident, how the trust was funded, and who receives the income or gain.
The 1 March 2026 changes are important because they clarify which rule applies first and what happens when a donor stops being a SA tax resident. SARS’s 2026 guidance reflects these changes in the trust tax return process.
The practical question when analysing a trust structure is therefore: Who does SA tax law treat as having earned the income or capital gain—the trust, the donor or the beneficiary?
Attribution can have a significant impact and does need to be taken into account. Answering that question correctly is essential when considering trust structures, estate planning, offshore investments and the investment of assets held within a trust.
If you wish to discuss this further, please contact Di Haiden – di@rcinv.co.za
Disclaimer: The contents of this article are for information purposes only and the accuracy, completeness, timeliness, or correct sequencing of any of the information contained herein cannot be guaranteed and should thus not be construed as investment advice. Readers should thus only act thereon after having consulted their financial advisor.
