Budget 2016 – The attention is turning to trusts

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.

Settlors beware: control over the assets of a trust

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.

Disposals by incentive trusts

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…”

Taxation of trusts in the future

Author: Heinrich Louw (Senior Associate at Cliffe Dekker Hofmeyr). Earlier this year the Davis Tax Committee (DTC) released its first report on estate duty for public comment. The report contained a number of disconcerting recommendations with regard to the taxation of trusts. The DTC was tasked with considering the use of trusts as vehicles employed by taxpayers to divest themselves of their assets during their lifetime, thereby saving estate duty upon their death. On the DTC’s analysis, there are two main problems with the current regime relating to the taxation of trusts.

Changes to the Income Tax Return for Trusts

Author: Mareli Treurnicht The South African Revenue Service (SARS) has amended the ITR12T form, (i.e. the Income Tax Return for Trusts) with effect from 12 October 2015. The form has been amended to include: certain changes to legislation; mandatory fields and sections which were previously optional; and automatic calculations. According to the SARS website, these changes arise from the implementation of system changes by SARS to cater for the processing of collective investment scheme (CIS) registrations and value-added tax (VAT) voluntary registrations in respect of vendors who have not yet made taxable supplies exceeding R50,000.00 per annum.

Amendments to the tax treatment of disposals by incentive trusts

Author: Heinrich Louw 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, No 58 of 1962 (Act), which provides that:

Seven reasons to get your trust in order

Author: Sumesh Somaroo, audit and assurance partner, BDO Durban Durban, September 2015. There are several common mistakes made in the operation of trusts that have been set up for estate planning purposes, to protect assets from creditors and for potential tax savings. So says Sumesh Somaroo, a partner at the Durban office of audit, advisory and tax firm, BDO South Africa, who warned that the verification of trust tax returns by SARS was on the increase and that it was important for people to get their trusts in order.

Taxation of estates to also be revisited?

Authors: Hanneke Farrand and Hannelie la Grange Introduction We previously commented on the recommendations made by the Davis Tax Committee (“DTC”) relating to the taxation of trusts in our article entitled “Taxation of trusts to be revisited?” dated 28 July 2015. We set out below our comments on the recommendations made in the DTC First Interim Report on Estate Duty (“DTC Report”) dealing with estate duty, capital gains tax (“CGT”) and donations tax. The Minister of Finance instructed the DTC to enquire into “the progressivity of the tax system and the role and continued relevance of estate duty to support a more equitable and progressive tax system”, specifically taking into account the interaction between CGT and estate duty. To this end, the DTC Report was released for public comment on 13 July 2015.

Estate planning: Tax trouble for trusts

Authors:  Ruan Jooste and Maarten Mittner (Financial Mail) The Davis Committee’s recommendations on the taxation of trusts and estate duties are punitive in their present form, say industry players, and could lead to new forms of legal avoidance. If the recommendations are implemented, all SA resident trusts and their beneficiaries or donors will be taxed as separate taxpayers. Trusts will be taxed at a flat income tax rate of 41% and an effective capital gains tax (CGT) rate of 27,31%.