Why minor children are special
A trust normally works as a conduit: income and gains it vests in a resident beneficiary in the same year are taxed in that beneficiary’s hands, not the trust’s, often at a lower rate. Families are therefore tempted to vest income in young children to use their lower tax brackets. The attribution rules in section 7 and the Eighth Schedule exist to stop exactly that.
The conduit only delivers the tax to the child if the attribution rules do not first redirect it back to the founder. Where income or a gain reaches a beneficiary because of a donation, settlement or other disposition by the parent, the Act taxes the parent instead — and this is at its sharpest with minor children. (For the conduit principle generally, see how trusts are taxed.)
Two things switch the minor-child rules on: a parent-child relationship, and a donation, settlement or other disposition by that parent that causes the child to benefit. Take either away and the rule does not bite — which is the key to planning around it below.
Section 7(3): income of a minor child
Section 7(3) is the headline rule. If a parent’s donation, settlement or other disposition is the reason income reaches their minor child — whether it accrues to the child, is spent on the child’s maintenance, education or benefit, or is accumulated for the child — that income is deemed to be the parent’s and is taxed at the parent’s marginal rate.
Income shall be deemed to have been received by the parent of any minor child or stepchild, if by reason of any donation, settlement or other disposition made by that parent of that child— (a) it has been received by or has accrued to or in favour of that child or has been expended for the maintenance, education or benefit of that child; or (b) it has been accumulated for the benefit of that child.
Note how wide the trigger is: it is not only money paid to the child. Income spent on school fees, or simply accumulated inside the trust for the child, is caught just as firmly. A “minor child” here means a child under the age of majority — which is 18.
A child, whether male or female, becomes a major upon reaching the age of 18 years.
Paragraph 69: capital gain of a minor child
Capital gains have their own mirror rule. Paragraph 69 of the Eighth Schedule attributes a minor child’s capital gain to the parent in the same way section 7(3) attributes income — to the extent the gain can be traced to a donation, settlement or other disposition by the parent.
Where a minor child’s capital gain or a capital gain that has vested in … or that has been used for the benefit of that child … can be attributed wholly or partly to any donation, settlement or other disposition— (a) made by a parent of that child … so much of that gain as can be so attributed must be disregarded when determining that child’s … capital gain … and must be taken into account in determining the … capital gain … of that parent.
This is why paragraph 80 — the capital-gains conduit — is expressly “subject to paragraphs 68, 69 and 71”. The conduit hands the gain to the beneficiary only if the attribution paragraphs do not first claw it back to the founder. A gain attributed to the parent is taxed in the parent’s hands at an effective rate of up to 18% (the top individual CGT rate), not at the child’s — but crucially it does not get to ride the child’s lower brackets the way the family hoped.
Section 7(5): conditional and contingent benefits
Section 7(5) deals with a different timing trick. Where a founder’s donation, settlement or other disposition holds income back behind a stipulation or condition — for example, “the beneficiary gets nothing until they reach 25” — the income that would otherwise have reached the beneficiary is taxed in the founder’s hands in the meantime.
If any person has made any donation, settlement or other disposition which is subject to a stipulation or condition … that the beneficiaries thereof … shall not receive the income … until the happening of some event …, so much of any income as would, but for such stipulation or condition, … be received by or accrue to … the beneficiaries, shall, until the happening of that event or the death of that person, whichever first takes place, be deemed to be the income of that person.
Section 7(5) is not limited to minors: it follows the founder’s condition, not the beneficiary’s age. It is the reason a “hold everything until they are older” clause does not defer the tax — it simply parks the income on the founder’s return until the condition is met or the founder dies.
Worked example: vesting in the Nkosi children
What happens at 18 — and what does not stop
The minor-child rules are tied to minority. Section 7(3) and paragraph 69 attribute only while the child is a minor — under 18, the age of majority under the Children’s Act 38 of 2005. Once a child turns 18, those two specific rules fall away, and income or a gain vested in that now-adult child can finally be taxed in the child’s own hands through the conduit.
Two further cautions. First, do not assume a multi-trust chain can sidestep these rules by stacking the flow-through — the Constitutional Court closed that door in the Thistle Trust case. Second, plan attribution and section 7C together: the route that escapes one frequently walks straight into the other.
Frequently asked questions
Generally no, while they are minors. If your children benefit from the trust because of a donation, settlement or other disposition you made, section 7(3) deems the income to be yours and taxes it at your marginal rate — not theirs. The same loop applies to capital gains under paragraph 69 of the Eighth Schedule.
Usually not — the parent is. Where income vests in a minor child because of the parent’s donation or settlement to the trust, section 7(3) deems that income to be the parent’s and taxes it in the parent’s hands. The ordinary conduit flow-through to the child is overridden.
They are anti-avoidance rules in section 7 and paragraphs 68 to 72 of the Eighth Schedule that redirect a trust’s income or gain back to the person whose donation, settlement or other disposition produced it. For minor children, s 7(3) and para 69 tax the parent; s 7(5) taxes the founder on income held back behind a condition.
The minor-child rules do. Section 7(3) and paragraph 69 only attribute while the child is a minor — under 18, the age of majority under the Children’s Act 38 of 2005. But attribution does not end altogether: s 7(5), s 7(8) and the section 7C loan rules can still tax the founder on benefits flowing to adult beneficiaries.
It deems income to have been received by the parent of a minor child or stepchild if, by reason of any donation, settlement or other disposition made by that parent, the income accrued to or was expended for the child’s benefit, or was accumulated for the child. The income is then taxed at the parent’s rate, not the child’s.