Time to reconsider trusts

DONATIONS TAX MAY NOW APPLY TO SOME ASSETS Brian Butchart, a CFP professional and Brenthurst Wealth MD, advises a reader considering holding shares in a trust.

Q: Should we use trusts to hold shares in companies, particularly now with the new rules on trusts? What is the best tax-wise? A: The question is not so much whether a share portfolio should still be held in a trust, but whether a trust is still an appropriate entity, based on your specific circumstances.

Section 7C of the Taxation Laws Amendment Act now prevents trusts from being used to avoid or reduce estate duty and donations tax. This has important consequences for anyone who transferred assets to a trust without being paid for the asset.

It was common practice to sell assets to a trust on an interest-free loan basis, if the trust had no liquidity or because the seller did not want to pay tax on the interest. The loan would then effectively be written off by the annual donations allowance of R100 000 per annum until the trust owned the asset entirely. This avoided donations and income tax.

Donations tax is calculated at a flat 20% of the value of the asset above your allowable donation of R100 000.

The South African Revenue Services (Sars) has deemed the practice of not charging interest on such loan accounts equivalent to a donation. Lenders are now required to charge interest of at least the repo rate plus 1%, (currently 8%) or pay donations tax.

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Loans of R1 250 000 or less will not attract donations tax, as an 8% interest rate applied to R1 250 000 is equivalent to the annual donations allowance of R100 000. Any interest on such loans above R100 000 will attract donations tax of 20% of that value if no transactional payment of the interest to the lender occurs.

This section applies even to loans made prior to March 1, 2017. The donation will be deemed to take place on the last day of any given tax year. So any donations in the 2017/2018 tax year will be deemed to be donated February 28, 2018 and any donations tax will be payable on March 31, 2018.

This would typically apply to trusts set up during your lifetime.

One should also consider the tax implications for a trust which has increased substantially over the years, taxed at a flat tax rate of 45% for any income earned and an effective 36% capital gains tax (CGT) rate.

Individual rates are substantially more attractive with income taxed according to the individual tax tables and a maximum 18% effective CGT.

It is, however, worth noting that endowments can offer some relief, as long as the beneficiaries are all natural persons.

One should consider all the implications of these tax changes. If a trust was created simply to save taxes, it may not serve that purpose any longer.

It may be worthwhile considering more effective alternatives to hold shares or any other asset(s) in a trust.