TAXING TRUSTS: CHANGES IN THE AIR

taxing trusts

The Davis Tax Committee’s first interim report on estate duty was released for public comment on 13 July 2015 and caused ripples for those using trusts to minimize estate duty obligations. It is a draft report and therefore still open to public input, comment and revision.

In terms of so-called ‘attribution provisions’ in the Income Tax Act, a trust is allowed to pass through any taxable income to the trust donor or beneficiaries that are natural persons for the income to be taxed in their hands. The benefit of doing this lies in the fact that the income tax rate for individuals is lower than that for trusts.

In order to generate more funds for the fiscus, the Committee recommends, amongst other things, that the provisions in terms of which trust income is taxed in the hands of beneficiaries or the donor at their lower marginal rates, as opposed to the flat higher rate of tax in a trust, are to be removed. This means that it is envisaged that trust income will always be taxed at the higher rate applicable to trusts, being 41% at present. It has been proposed that this flat rate should be maintained at its existing level.

(Note that taxation of “special trusts” is treated differently. Special trusts are those that were established for the benefit of disabled adults, or minor children. These trusts are taxed at the income tax and capital gains tax rates that apply to individuals. The committee recommends that, as at present, special trusts continue to be taxed as natural persons.)

Due to the far reaching implications of the suggested changes if they are to be implemented, the committee further proposed that it would be in the interests of equity and certainty that the repeal of the attribution provisions be announced in the 2016 Budget Speech and to be implemented with
effect from 1 March 2016.

The report further clears up a common concern that there is a legislative intention to do away with trusts. This is not correct. Rather, the report states that “taxpayers must be allowed to make use of trusts when it makes sound sense to do so in the pursuit of a commercial benefit. However, as is
the case with present company tax rates today, the taxpayer must accept any potential adverse tax consequences. Taxpayers who pursue the postponement of estate duty through the use of trusts will remain at liberty to do so. But upon sale of the assets of a trust, a higher rate of tax will be imposed,
thus compensating for the estate duty loss.”

As the saying goes, “watch this space” for news on developments in this regards and consult with Martin Sheard, Director at STBB Smith Tabata Buchanan Boyes at martins@stbb.co.za for assistance.

www.stbb.co.za

021 673 4700

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