On 19 January 2017 the Taxation Laws Amendment Act, No 16 of 2016 (2016 Amendment Act) came into effect. The 2016 Amendment Act introduced s7C into the Income Tax Act, No 58 of 1962 (Act) which provision will come into effect on 1 March 2017. Section 7C will bring about some important changes to the tax dispensation applicable to trusts.
For a number of years, National Treasury indicated that it intended tightening up the tax provisions applicable to trusts. On 8 July 2016, the Draft Taxation Laws Amendment Bill (Draft TLAB) and the Explanatory Memorandum on the Draft TLAB (Explanatory Memorandum) were released by National Treasury. The Draft TLAB proposes to introduce a new s7C into the Income Tax Act, No 58 of 1962 (Act), which will have far-reaching tax consequences for trusts and persons utilising trusts as an investment vehicle, if it is enacted in its present form.
Investors in shares are able to defer capital gains tax (CGT) using unit trusts. The deferral works as follows: Section 42 of the Income Tax Act, No 58 of 1962 (IT Act) allows a taxpayer to transfer listed shares to a company free of immediate tax consequences if certain requirements are met. One requirement is that the shares must be transferred in exchange for “equity shares” in the transferee company. If the requirements are met the taxpayer suffers no CGT or securities transfer tax (STT) in relation to the shares transferred. The taxpayer must account for CGT in future when it disposes of the equity shares it has acquired in exchange for the assets.
Authors: Bernard du Plessis and Peter Dachs (ENSafrica). The Taxation Laws Amendment Bill 2016 has been released for public comment. It introduces various interesting amendments to South Africa’s tax law, which include the following: Use of trusts In circumstances where an interest-free loan has been advanced to a trust by a connected person (which includes a beneficiary or a relative of a beneficiary), it is proposed that a market-related rate of interest (currently 8%) is deemed to be paid on that loan. This deemed interest will not be tax deductible in the hands of the trust but will be taxable in the hands of the lender and will not qualify for an interest exemption.
As a basic principle, under section 102(1) of the Tax Administration Act 28 of 2011 (the TAA), the onus of proof that an amount is not taxable or that an amount is deductible, rests on the taxpayer, whereas under section 102(2) of the TAA, the onus of proof pertaining to the facts upon which an understatement penalty is imposed, is upon the South African Revenue Service (SARS). Too often, upon the conclusion of investigations or reviews, SARS threatens exorbitant understatement penalties for seemingly innocuous and easily resolvable queries. A good example is the classic turnover/expenditure reconciliation process which could produce, in certain instances, horrendous results for a taxpayer where the calculations are devoid of commercial logic.
Author: Maarten Mittner (BDlive). The tax efficiency of trusts may have taken a knock after the latest budget proposals, but trusts are likely still to remain viable wealth-preserving instruments. Some analysts have raised alarm at the possible negative consequences of the new proposals, but others remain optimistic. The days of using trusts to avoid tax or reduce a tax burden, however, may be over. Finance Minister Pravin Gordhan had harsh words for trusts in last month’s budget. In the review, he said the government’s aim was to keep the tax system progressive. Some taxpayers used trusts to avoid paying estate duty and donations tax, the review said.
Author: Amanda Visser (IOL). Proposed changes to the tax treatment of trusts could bring an end to a common abuse of trusts as a way of reducing estate duty. National Treasury and the South African Revenue Service (SARS) have increasingly attacked the use of trusts to limit the tax liability of especially the very wealthy through estate planning.
Currently trusts are used as an important vehicle to avoid the payment of estate duty and to create an insolvency remote vehicle through means of which investments can be done. However, it is always problematic how to fund a trust as one cannot subscribe for shares in a trust such that one would, for instance, do in the case of a company. More often than not assets are sold (at market value) to a trust in circumstances where the purchase price is left outstanding as an interest free loan. In addition, no donations tax would be triggered as the assets are not included in the estate of the donor at death.
The establishment of an offshore discretionary trust (“the Trust”) by a South African tax resident person (“Settlor”) gives rise to various South African tax considerations. In terms of current law (which may or may not be impacted upon by the various proposals set out in the Davis Tax Committee’s First Interim Report on Estate Duty), the following taxes may typically be triggered by the Settlor in respect of the disposal of assets to the Trust in settlement thereof: capital gains tax at a maximum effective rate of approximately 13.65% of the capital gain realised; donations tax at a rate of 20% of the amount or the market value of the assets donated; and any income derived by the Trust in respect of any donation made by the Settlor may be attributed to the Settlor and accordingly subject to South African income tax in his/her hands.
Generally, where an employer establishes a trust to hold certain shares for future distribution to its employees as part of a share incentive scheme, the scheme is structured in such a manner that there are no capital gains or losses for the trust upon distribution. In this regard, reliance is usually placed on paragraph 11(2)(j) of the Eighth Schedule of the Income Tax Act of 1962 (the Act), which provides that: “(2) There is no disposal of an asset: … (j) which constitutes an equity instrument contemplated in section 8C, which has not yet vested as contemplated in that section…”