Treasury publishes tax changes affecting pensions, trusts, and individuals

National Treasury and the South African Revenue Service have published various draft Bills and regulations that give effect to the tax proposals announced in the 2025 Budget.

The following Bills were published on 16 August for public comment:

• 2025 Draft Taxation Laws Amendment Bill (TLAB).
• 2025 Draft Tax Administration Laws Amendment Bill (TALAB).
• Draft regulations on the domestic reverse charge relating to valuable metal issued in terms of section 74(2) of the Value-Added Tax Act.
• Draft regulations prescribing the application of paragraph (d) of the definition of “exported” in section 1(1) of the VAT Act.

Comments must be sent to National Treasury at 2025AnnexCProp@treasury.gov.za and SARS at 2025legislationcomments@sars.gov.za by close of business on 12 September.

The draft TLAB contains proposed amendments to the Income Tax Act (ITA) that may affect individual taxpayers, including retirement fund members, investors in collective investment schemes, and trust beneficiaries.

The TLAB also contains amendments to the ITA, VAT Act, Customs and Excise Act, Carbon Tax Act, and Global Minimum Tax Act.

The main amendments to the abovementioned Acts are disclosed in National Treasury’s Explanatory Memorandum to the draft Bill.

The amendments to the ITA that are likely to have a direct effect on individuals are discussed below.

Tax treatment of foreign pensions

Section 10(1)(gC)(ii) of the ITA exempts certain foreign-sourced lump sums, pensions, or annuities received by residents as consideration for past employment outside South Africa. The purpose is to avoid the double taxation of retirement income earned while the person was not taxed in South Africa. South African residents who worked abroad and contributed to a foreign retirement fund qualify for the section 10(1)(gC)(ii) exemption in South Africa.

Treasury proposes that section 10(1)(gC)(ii) be deleted so that foreign retirement benefits received by South African residents are taxed in accordance with the residence basis of taxation.

The proposed amendment will come into operation on 1 March 2026 and apply in respect of the years of assessment commencing on or after that date.

National Treasury says there are two main issues with the current blanket exemption.

First, the exemption may result in double non-taxation, particularly where a foreign jurisdiction does not tax the retirement income because of domestic law or tax-treaty limitations. In these cases, neither South Africa nor the foreign jurisdiction imposes tax on the retirement benefit. This undermines South Africa’s residence-based system of taxation and leads to revenue forgone to the fiscus.

Second, where a double taxation agreement grants South Africa the exclusive right to tax such retirement benefits based on residence, South Africa forfeits this right by maintaining the exemption in section 10(1)(gC)(ii). As a result, the foreign jurisdiction, despite lacking primary taxing rights under the treaty, may choose to tax the retirement benefits because South Africa does not tax them. This misalignment allows the foreign jurisdiction to benefit from taxing rights that South Africa does not exercise.

Clarifying the payment of death benefits

Death is treated as a retirement event, and lump sums from the vested and retirement components are taxed per the favourable retirement fund lump-sum tables. Lump sums from the savings component, when paid to a nominee or dependant on a member’s death, have sometimes been taxed as a savings withdrawal benefit (ordinary income subject to marginal rates) in the nominee’s or dependant’s hands.

The ITA will be amended to clarify that death benefits payable to a nominee or dependant as a lump sum from a member’s interest in any of the three components (vested, retirement, savings) qualify as retirement fund lump-sum benefits and are taxable at the favourable lump-sum tax rates. Nominees or dependants should have the flexibility to elect a lump sum or annuity without adverse tax consequences.

The amendment will be deemed to have come into operation on 1 September 2024.

Retirement fund interest assigned to a non-member spouse under religious tenets

The Pension Funds Act (PFA) was amended in 2024 to recognise the assignment, in terms of a divorce order, of retirement fund interests to a non-member spouse married according to religious tenets. However, despite the legal recognition under the PFA, the ITA has not been updated to accommodate this development.

Wording will be added to paragraph 2(1)(b)(iA) of the Second Schedule to provide for the inclusion (for tax purposes) of an amount assigned to a non-member spouse under the tenets of a religion.

The amendment will come into operation on 1 March 2026 and apply to the years of assessment commencing on or after that date.

Reinstating the exemption for child maintenance payments

Before changes to the ITA between 2007 and 2009, the recipient of child maintenance funded from after-tax income was treated as exempt. In the course of subsequent legislative changes, the exemption for non-retirement-fund child maintenance payments was inadvertently removed. Since 2009, these payments have in practice been included in the recipient’s taxable income.

The ITA will be amended to exempt child maintenance payments funded from after-tax income so that ordinary child maintenance remains tax-exempt for the recipient.

Treasury says taxing child maintenance funded from after-tax income is inconsistent with the intended tax treatment (these amounts are support for a child, not income for the recipient), and no policy rationale was provided for making general child maintenance taxable.

The proposal will come into operation on 1 March 2026 and apply to the years of assessment commencing on or after that date.

Reducing the threshold for ring-fencing of assessed losses

Section 20A of the ITA ring-fences assessed losses from certain trades, so those losses may be set off only against future income from the same trade, where two conditions are met:

• the taxpayer is taxed at the top marginal rate (for example, taxable income of more than R1.817 million for the 2026 year of assessment; and
• the trade has produced assessed losses in at least three of the preceding five years or is one of nine specified “suspect” trades. These trades include sporting activities, dealing in collectibles, performing or creative arts, gambling, farming (unless full-time), and renting out residential accommodation, vehicles, aircraft, or boats (unless at least 80% use is by unrelated parties).

The proposal is to lower the taxable-income threshold in section 20A(2) so that ring-fencing applies to more taxpayers engaged in suspect trades and consistently claiming such losses, thereby reducing avoidance by those slightly below the top rate. The proposal also includes a technical amendment to the listed scope (deleting “or activities of a similar nature” from the farming item to align the wording).

Treasury said some taxpayers earning just below the top marginal tax rate are using strategies to claim suspect-trade losses to reduce their taxable income; because the current rules apply only at the top marginal rate, such taxpayers can avoid ring-fencing. The government wants to close this gap.

The proposed amendment will come into operation on 1 March 2026 and apply to the years of assessment commencing on or after that date.

Amending the definition of ‘remuneration proxy’

The term “remuneration proxy” is used in a variety of provisions throughout the ITA. It serves as a reference point for calculating certain tax benefits, thresholds, and values where actual remuneration for the current year may not be available. It is often equated with “remuneration” as defined in the Fourth Schedule to the Act and is particularly relevant for formula-based calculations where prior-year remuneration is used as a proxy for present-year values.

It is proposed to amend the definition of remuneration proxy in section 1 of the Act to include income that was exempt under section 10(1)(o)(ii) so that the remuneration proxy better reflects a taxpayer’s economic participation.

Treasury says taxpayers who qualified for the foreign employment income exemption under section 10(1)(o)(ii) in the prior year can end up with an artificially reduced remuneration proxy because exempt income is excluded from the proxy.

The amendment will come into operation on 1 March 2026 and apply to the years of assessment commencing on or after that date.

Capital distributions by unit trust funds

Since 1 January 2010, unit trusts or collective investments schemes have been treated under a conduit or flow-through principle so that income (interest, dividends, rental income, or trading income) earned by the fund flows directly to the individual unit-holders without being taxed first at fund level.

Generally, if the CIS realises a capital gain, the gain is not taxed at fund level because of the exclusion in paragraph 61 of the Eighth Schedule. The investor (holder of a participatory interest) is also not tax on the distribution of the gain because there was no disposal by the holder. Capital gains realised by the fund are taxed only when a holder sells units in the fund, and the capital gain or loss is based on the difference between the proceeds from the units sold and the original cost.

However, the Act does not clearly address “capital distributions”, which are payments made by a CIS to its investors that come from the fund’s “capital”, rather than from its income or trading profits from selling investments.

Treasury says paragraph 61 of the Eighth Schedule to the Act does not explicitly address how capital distributions should be treated. Although rules exist for what happens when a fund is closed down (liquidated) – where payments are generally seen as proceeds from selling units – there is no distinct rule for payments made from the fund’s capital while it is still operating.

This lack of clarity can lead to confusion for both investors and tax authorities. It creates uncertainty about how such payments should be taxed, potentially leading to inconsistent treatment or unintended tax outcomes.

Treasury’s December 2024 discussion document proposed inserting a new paragraph in the Eighth Schedule so that a capital distribution that is not income would reduce the base cost of the participatory interest for the holder (in other words, holders would reduce expenditure in respect of the participatory interest by the amount of the distribution).

Respondents pointed out practical problems with this approach because a CIS does not generally have access to investors’ base-cost information and cannot reliably advise investors on the necessary tax adjustments.

Instead of requiring adjustments to the base cost of participatory interests, it is proposed to treat all capital distributions from a CIS as capital gains when distributed.

Treasury says the amendment may “accelerate tax liabilities for some investors”, but it avoids complexity of base-cost adjustments and is considered acceptable given that capital distributions are typically infrequent and relatively minor.

The proposed amendment will come into operation on 1 March 2026 and apply to disposals or distributions made on or after that date.

Taxation of trusts and their beneficiaries

Currently, income received by a trust may be taxed in the hands of the donor, the beneficiary or the trust. When determining who will be taxed, the attribution or flow-through principle is applied. The flow-through principle ensures that the income distributed by the trust retains its nature as if it had been received directly and not through a trust. In essence, the flow-through principle ensures that the income is taxed in the hands of the person who benefits from the income. Attribution rules exist to tax income in the hands of the donor in certain cases.

In 2023, amendments intended that the flow-through principle be limited to resident beneficiaries; income vested in or distributed to non-residents should be taxed in the trust, because the government found it difficult to identify and collect tax from non-residents.

Treasury says the current wording of the Act does not always achieve the 2023 policy intent and, in some instances, may still be interpreted to include non-resident beneficiaries and donors, defeating the policy objective of limiting the flow-through to residents.

The Act will be amended so that the flow-through and attribution principles apply only to income received by or accrued to resident beneficiaries and to resident donors.

The Explanatory Memorandum includes the following example: ABC Trust (resident) receives two donations (R1m from resident A and R1m from non-resident B). The trust’s investments yield interest of R200 000. The trustees do not vest the interest to any discretionary beneficiaries.

The tax consequences are:

• Under section 7(5), donor A (resident) is required to include R100 000 (R200 000 x R1m donated of the R2m total invested in the interest-bearing investment) in A’s income tax return.
• Section 7(5) does not apply to donor B, because B is non-resident.
• Section 25B requires the ABC Trust to include the remaining R100 000 in its taxable income.

The proposal therefore limits the flow-through/attribution to resident donors and beneficiaries and places non-resident amounts in the trust for tax purposes.

The proposed amendment will come into operation on 1 March 2026 and apply in respect of the years of assessment commencing on or after that date.