I chaired the session on this topic at the 2017 Tax Indaba. The experts on the panel that provided valuable input into the discussions on stage and also reflected below were Cheryl Howard CA(SA) from Talaria Wealth, Johann Jacobs from CDH Legal, and Louis Venter from Wealth Succession.
There are various reasons for creating a trust. If, however, a trust was created solely for tax planning purposes then the primary reason for establishing a trust is missed. Taxpayers should not terminate a structure that may have sound reasons for establishment in the first place. A trust ensures continuity of family and transfer of legacy to future generations. Assets are protected and the founder has limited liability. A trust offers protection for minors, the aged, mentally and physically challenged. From a tax perspective, a trust aids in estate planning by pegging the estate for the founder.
Game-changing tax legislation/protocol have been introduced that affects trusts. SARS previously introduced a comprehensive trust tax return which was coupled with cross referencing. In addition, the capital gains tax inclusion rate for normal trusts was increased effective 1 March 2016 to 80%. This brings the effective inclusion rate for normal trusts to 36%. Section 7C applies with effect from 1 March 2017 and is applicable on a loan or credit provided to a trust by a natural person, on or after that date. Where interest is charged less than the official rate, a donation takes place on the difference between interest that is charged and the official interest rate.
Further changes are currently proposed to section 7C – that is, new anti-avoidance in respect of loans made to companies, new anti-avoidance on the transfer of loan accounts to current or future beneficiaries, and the exclusion of employee share incentive trusts from the application of section 7C.
Tax consequences are triggered on terminating a trust. There will most likely be capital gains on the disposal of assets held by the trust. The capital gains will be either be attributed to the donor, taxed in the trust or in the in the hands of the beneficiaries. Transfer duty could be applicable for properties being repaid as loan account repayments. The exemption applicable to trust distributions will not apply as the distribution is not in terms of a will or written instrument but rather an instruction payment. Securities transfer tax will be levied on the transfer of shares held by the trust.
Value-Added Tax (VAT) output will also be triggered when a trust that is registered as a VAT vendor ceases to be a vendor. Income stemming from the assets as well as the assets previously held in the trust are back in the tax net of the beneficiaries.
Taxpayers should be careful of knee-jerk reactions. In terms of the Estate Duty Act, the Finance Minister can increase the estate duty rate at his discretion. A review of the worldwide comparative estate duty rates indicate that South Africa is behind in this regard. To increase the rate by a percentage is easy and would also be a quick and simple method of collecting additional revenue. Structures that have been put in place to achieve certain estate planning objectives could then unnecessarily be terminated and the tax consequence could be far greater.
Professional costs for maintaining a trust structure is relatively low in comparison to investment advisor fees.
Muneer Hassan CA(SA) is a Tax Consultant, Senior Lecturer in Taxation at UJ and Lecturer on the Gauteng Board Course