The South African trust, notably the discretionary trust, is currently widely used as an estate-planning structure that (historically) has been considered when dealing with wealthy individuals and their families. Due to the legitimate benefits of the discretionary trust, coupled with an unfortunate perception that wealthy individuals only establish trusts to evade tax obligations, there has been significant and increasing focus on trusts in recent years. As a result of this focus, clients are naturally concerned that family trusts are 'under attack' by SARS.
In light of this perceived hostile attitude towards family trusts there has been a great deal of interest in the work being done by the Davis Tax Committee (DTC). With part of the terms of reference of the committee being to explore alternative ways to bring about a more progressive and equitable tax system, the release of the first interim report on estate duty (which addresses trusts) brings us closer to finally having policy certainty around the future of family trusts. While the interim report is only a recommendation, and certain aspects are being met with strongly motivated objections from industry bodies, it gives indication of the proposed changes that the National Treasury will be considering, perhaps as early as the 2016 Budget Speech.
While many of the interim report recommendations have an indirect impact on family trusts, the DTC recommendations that directly and materially relate to family trusts are the proposals to:
remove attribution rules (s. 7) that require a certain portion of tax to be 'attributed' o the founder or donor; andremove the conduit principle (s. 25B) that enables income and capital gains to flow through the trust be distributed to the income and/or capital beneficiary (ies) and be taxed in the hands of the beneficiary (ies).
The effect of these proposals would be for tax to be exclusively levied against the trust, removing the common law principle that income passed through a trust retains its nature and should be taxed in the hands of the ultimate beneficiary.
With regard to income tax, those who will be most affected will be beneficiaries that are reliant on the trust income to fund their living expenses, as they will no longer benefit from the sliding scale, culminating at 41%. With regard to capital gains tax, the proposals will mean that all qualifying capital gains in the trust will be taxed at an effective rate of 27,3%. This is significant when compared to an individual who is taxed at a maximum effective rate of 13,6%.
However, on a positive note, there is an indication that interest-free loans will be removed from the realm of dispute, with no transfer pricing adjustment being made on interest-free loans.
Family trusts aren't necessarily established purely for estate planning or other tax benefits. Family trusts are flexible and versatile structures that are appropriate for a number of purposes, including:
If the proposals are adopted in their current form, the alternative benefits of a family trust remain relevant but planners will now need to pay particular attention to the cost-benefit analysis from a tax perspective. It remains the view of Nedbank Private Wealth that trusts should never be established purely for a tax benefit. As such, whether or not clients should consider forming a family trust in the future, or contemplate requesting their trustees to wind down an existing trust, depends largely on the purpose for which it was originally established.
Robust feedback has been submitted to the proposals listed above. In particular, it has been submitted that when income is legitimately distributed to a beneficiary, the beneficiary should be taxed. It is, therefore, anticipated that the current proposals will be 'watered down' substantially.
Please contact your relationship manager to schedule an appointment with a fiduciary specialist, who will assist you with drafting or reviewing your will.
DISCLAIMER The Fiduciary Focus Newsletter is intended for general information purposes only and should not be construed as tax, legal or accounting advice. This
communication is based on our bona fide interpretation of legislation, rules, regulations and publications. Nedbank Private Wealth provides estate and tax planning advice; however, we do not provide tax, legal or accounting advice and you are requested to consult a professional tax advisor or professional in this regard.
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