12 Apr TAX INCIDENTAL TO TRUSTS
There are laws that prevent trusts being exploited for tax avoidance purposes. Unlike a company or close corporation, a discretionary living trust is not a juristic entity. It cannot be owned, transferred or sold. The assets can be owned, transferred or sold, but not the trust itself. The value of utilising a discretionary living trust as part of an estate plan, is incalculable. Legitimate tax breaks are just one benefit but taxes are complex and subject to variation.
The following information is provided as a general overview. For greater detail, one would need to consult a Tax Specialist. Taxes that apply to trusts include:
The trustees must register the trust with the South African Revenue Services (SARS) as the receipt or accrual of income has to be declared by the trust for income tax purposes. Any income received by the trust is taxed at a flat rate and no rebates apply. Income tax returns for the trust must be submitted to SARS for annual assessment, (from 1 March – 28 February), so it is important to have a reliable accountant or bookkeeper keeping track of transactional inflows and outflows.
The trustees may choose to apply the conduit principle and shift the tax burden to the beneficiaries, who will be personally liable (on a sliding scale) for the income tax. This allows the income to ‘flow through’ the trust to the beneficiaries and negates any trust liability for income tax. The law allows a trust to distribute to beneficiaries, certain amounts per annum, tax-free in their pockets. The amounts vary by age, with the advantage going to senior citizens. It may be split over a year or delivered as a single payout. The trustees also have the discretion to pay the income to the beneficiaries indirectly, for instance, by paying education fees on their behalf.
CAPITAL GAINS TAX
The trust is liable for capital gains tax on any trust property sold. This may also be mitigated with the conduit principle if the trustees vest the gain in the beneficiaries (that is, gains acquired in the same tax year). The beneficiaries would then be liable to pay tax according to their individual tax rates. If a beneficiary is a non-resident, the trust becomes liable for the capital gains tax. TRANSFER DUTY This is levied on immovable property. If a property is sold to the trust by the founder (during his or her lifetime), the founder will have to pay capital gains tax and the trust will pay the transfer duty.
If such property (like a house) is inherited via a trust and transferred out of the trust by the beneficiary, the beneficiary is exempt from transfer duty up to the third generation of consanguinity to the founder.
Without a trust, estate duty is applied. Estate duty does not apply to assets vested in a trust.
Donations tax, paid by the donor, is levied at a flat rate. A set annual donations tax exemption is allowed per person for each tax year. Spouses may make donations to one another, irrespective of value, and enjoy exemption from donations tax. A distribution from a discretionary living trust to beneficiaries, irrespective of the amount, is exempt from donations tax.
SECONDARY TIER CORPORATIONS TAX (or Dividends Tax)
Assets owned by a trust, are not exposed to dividends tax. There are avenues individuals can explore that legitimately mitigate the tax burden. A Tax Specialist or Estate Planning Specialist is best qualified to assist.