It is not news that the fiscus has been bearing down on the use of Trusts by taxpayers in recent years. Finance Minister, Pravin Gordhan, has made this abundantly clear on numerous occasions and his sentiment seems to be echoed by Oupa Magashule, the Commissioner for the South African Revenue Service.
Statements have been made by the fiscus that Trusts will be under scrutiny going forward and that they will be subject to compliance checks and integrated audits.
The negative view of Trusts is very closely linked with the perceived misuse by wealthy South Africans or the so-called “high net worth individuals”. In his 2013 Budget Speech, Finance Minister Pravin Gordhan reiterated his position regarding the abuse of Trusts by indicating that reforms will be made regarding the taxation of both local and offshore Trusts which have “long been a problem for global tax enforcement due to their flexibility and flow-through nature”.
The proposals include amendments to the taxation of Discretionary Trusts and Trading Trusts. It is intimated that the “conduit pipe” principle may be under review as the proposals specifically state that these trusts should no longer act as flow-through vehicles. Although it is not clear at this stage what exactly is intended, the proposals suggest that taxable income/losses and capital gains/losses will be taxed in the Trust, while distributions will be deductible to the extent that there is current taxable income. Where distributions are deductible for the Trust, they will be taxable as ordinary income in the hands of beneficiaries. In addition, it is proposed that distributions from offshore foundations will be treated as ordinary income with a view to curbing schemes designed to shield income from global taxation.
The proposals are specifically not intended to affect Trusts established to attend to the legitimate needs of minor children and people with disabilities i.e. ‘special trusts’ as defined in the Income Tax Act. Also, it appears as though the estate duty planning functionality of Trusts may be challenged.
While one can appreciate that there certainly has been an element of abuse of Trusts in the past, there are also legitimate, practical reasons for the use of Trusts. It will be important for taxpayers to consider the amendments when they are legislated to ascertain the full extent of the implications.
* This article was prepared by BDO