So what is the future of trusts?

One of the questions that we are most confronted with by our clients is what the future of trusts are in South Africa. Some questions even point to the misconception that the trust instrument itself as legal form is on the verge of being scrapped in South Africa altogether!

The current debate raging is not at all that dramatic, although the consequences for taxpayers potentially may be. The “crystal ball” gazing exercise which we are so often requested to undertake stems from repeated warnings (some less subtle than other) by the Minister of Finance that the use of trusts as a tool to minimize tax exposure, be it in the form of income tax or estate duty, is being revisited by National Treasury to try and find a solution to the perceived abuse thereof. As recently as in the 2016 budget, the following statement is made:

“Some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.”

This alludes both to how trusts are commonly used to minimize tax obligations, as well as how Treasury intends to (what could be considered a more focused) approach to trusts in future, while also hinting at what may be expected going forward.

As a first comment, trusts are popular estate duty planning instruments. Without going into too much detail, typically an individual will sell his/her assets to a trust on interest free loan account. In the coming years, the value of the assets will increase in the trust, while the value of the loan account will remain the same in the hands of the individual.

Secondly, trusts are potentially useful for income tax planning purposes as they allow for income to be distributed to individuals that are subject to tax at rates more beneficial than that of the trust (which involves ‘income-splitting’ referred to by Treasury above). Typically, these distributions often contain a fictitious element through distributions made on interest free loan account only (with no real intention that such distributions should vest in the beneficiaries).

It would appear as though Treasury is no longer considering an ‘out-and-out’ onslaught on the taxation of trusts (although this is only speculation). However, the recent budget perhaps betrays what may be expected and that anti-avoidance legislation is to be introduced that will focus only on abusive practices involving trusts. For both estate duty and income tax structures involving trusts, it is not far fetched to expect to see provisions introduced into tax legislation which will ensure that loan accounts with trusts all bear interest. The significance of this? Interest receipts are subject to income tax.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE).


Posted

in

by

We use cookies to improve your experience on our website. By continuing to browse, you agree to our use of cookies
X

IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.

ic@newtons-sa.co.za

SCHALK GOUWS

Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.

schalk@newtons-sa.co.za

CEDRIC PETERSON

Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.

cedric@newtons-sa.co.za

LUCHA GREYLING

Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.

lucha@newtons-sa.co.za