SA haunted by a growing wealth imbalance

point where many wealthy people feel that they are being unfairly targeted for greater tax liabilities.

People generally are comfortable to pay taxes if they feel that the taxation system is fair, and if they can see the benefits to the country of the taxes they have contributed. But, when the state increases the tax burden on the wealthy as a result of mismanagement, propping up failed state-owned enterprises, and the looting of state coffers through corruption, there is a strong sense that the tax burden is no longer fair or justifiable.

In addition to the tax burden, comments about land redistribution without compensation, and resultant actions and threats, are causing HNWIs to feel less secure in the country and to wonder about the future. Despite the positive promise of the Ramaphosa presidency, many individuals have a heightened sense of uncertainty.

This is the background to the significant immigration from the country by those with the greatest means to live elsewhere: it is estimated that, since 2000, well more than 8 000 wealthy people left the country, removing large sums of wealth in cash and other assets from the country.

From a financial perspective, the impact on the country is worrying. Not only are assets taken out, but the country loses the current and future income tax that these people would have paid. In addition, in many instances, they close locally-based businesses, too, so cutting jobs, which only adds to the already extremely high levels of poverty in the country. In addition, the loss of skilled people and those with business experience impacts the country, in that our already poor skills base becomes even smaller.

The route to correcting the Gini Coefficient is certainly not through reducing the numbers of wealthy people. Instead, the country should be working towards growing the size of the middle class. This can be achieved through a concerted effort by the state to create more employment opportunities, in partnership with the private sector, which is crucial for the creation of meaningful and sustainable new jobs.

This should be done together with a greater focus on the effective delivery of skills training. Concentrating on these factors will allow many South Africans currently under the yoke of poverty to move out of that situation and become income-earners able to support themselves and able to pay taxes.

Other Gini Coefficient data shows that the lowest income inequality is found in the richest countries, like Sweden, Germany and Britain. In fact, in the Nordic countries, the middle class makes up the largest group in society – at around 65 to 70 percent of all households.

The situation in South Africa is from this.

Our focus should be on making the wealthy feel comfortable to stay in the country. This way they will continue to contribute economically and remain on as taxpayers.

South Africa provides plenty of the factors positive for the wealthy to remain here. far The quality of life is very favourable for those with means – the natural beauty and good climate make it an attractive place to live. Private healthcare and schooling are generally of high quality. The luxury property and retail market is well developed with superior food stores, international clothing brands and other luxury items being readily available. Our private security industry is also well developed.

In addition, the country has a sophisticated and well-developed financial market. A global firm like the Geneva Management Group has chosen to open offices in the country for exactly that reason.

With the potential for greater political stability promised by a Ramaphosa presidency and a strengthening rand, the likelihood of growth in the number of HNWIs is promising.

However, the state needs to ensure that, through fiscal reform, it changes the perception that the wealthy will be singled out as a target of greater taxation, to fill coffers that have been raided by corruption and graft. This could be done through meaningful initiatives that reflect genuine efforts geared to reduce our unemployment rate and so to widen the tax base of the country.

With a focus on getting more people working and on the education needed to improve our skills base, we may well be able to look forward to a larger middle class, and stop the scenario of “the rich getting richer, while the poor get poorer”.

WHEN trust practitioners set up trusts for their clients, they often choose arbitrary founders for the trust, completely disregarding this critical requirement. Clients are often advised that the founder cannot, or should not, simultaneously hold the role of trustee and/or beneficiary. This is simply not true. The Trust Property Control Act acknowledges that the founder can also be a trustee, through the definition of a trustee as “any person (including the founder of a trust) who acts as trustee”.

The key element of the trust arrangement is the transfer of ownership and control of the trust assets from the founder to one or more trustees who hold the trust assets not in their personal capacities but for the benefit of the trust beneficiaries.

The founder is the person who sets up the trust. There may be more than one founder, who has to be the person (or persons) who intended setting up the trust.

The proposed founder of a trust should always be asked whether he or she has a true intention to create a trust for the benefit of the beneficiaries, as well as whether this person will make the initial donation to the trust. Failure to do so could affect the potential validity of the trust. The founder may therefore not be the lawyer who sets up the trust, or his or her secretary.

You can be founder, trustee and beneficiary

If you are the founder of your family trust, do not allow anyone to convince you that you cannot also be a trustee (who influences decisions) and a beneficiary (who receives benefits from the trust). The founder of a trust may also be a trustee and/or a beneficiary of a trust.

However, the founder is not permitted to be the only trustee of a trust, because a trust is a contract and a person cannot contract with him- or herself. This stems from the legal principle that a trust deed executed by the founder and trustees of a trust for the benefit of others is akin to a contract for the benefit of a third party, also known as a stipulatio alteri (Crookes v Watson case of 1956).

It is permitted that the same person is the founder, a trustee and a beneficiary (Goodricke and Son (Pty) Ltd v Registrar of Deeds case of 1974), but this person is not permitted to be the only trustee and beneficiary. If you want to be the founder, a trustee and a beneficiary, you have to appoint an independent trustee to the trust. The independent trustee could be a person, or an entity, who has no family relation or connection, blood or otherwise, to the trustees, beneficiaries or founder of the trust, and who is also not a beneficiary of the trust.

Tax issues

It appears that so-called trust practitioners often discourage clients from acting as founders, because they do not understand the tax laws properly. The anti-avoidance taxation provisions are not concerned with who formed or created the trust (the founder), but with the person who transferred the assets into the trust (the donor/ funder).

These provisions effectively seek to tax

If an asset is disposed of for less than its market value, the difference between the selling price and the market value is deemed a donation for the purposes of section 7 (section 7(9) of the Income Tax Act). Such difference will be applied to the provisions of the anti-avoidance rules.

It is important to note that these deeming provisions related to the donor/funder will be applicable only while such person is alive. After his or her death, the trust will be taxed on the income or capital gains retained in the trust.

Any tax payable by the donor or funder “may”, however, be recovered from the person entitled to the receipt (section 91(4) of the Income Tax Act). In the event that these taxes are not recovered from the trust, they will be regarded as a donation of such amount, on which donations tax (20 percent) will be payable.

If you are the founder of your family trust, do not allow anyone to convince you that you cannot also be a trustee (who influences decisions) and a beneficiary.

Benefit of being the founder

A unique transfer duty concession is enjoyed by beneficiaries who are related to the founder. No transfer duty is payable when fixed property is transferred to a beneficiary who is related to the founder by blood, within three degrees of consanguinity. This concession applies when no consideration is paid directly or indirectly by this relative in respect of the acquisition of such trust property (section 9(4)(b) of the Transfer Duty Act).

There are ways of structuring your trust where you can be the founder, trustee and beneficiary of the trust, while satisfying the South African Revenue Service and the Master of the High Court of the legitimacy and lawfulness of your trust structure. It is critical, however, that you engage the service of an experienced professional, as the incorrect drafting of your trust deed may spell disaster.