Far-reaching changes to trust taxation on their way
THE Davis Tax Committee (DTC) has proposed some far-reaching changes to the taxation of trusts.
Although trusts are taxed at a higher rate than any other entity, the provisions in Sections 7 and 25B of the Income Tax Act allow trustees to distribute income to the trust beneficiaries where it is taxed in the hands of the beneficiaries at lower personal income tax rates. This is commonly referred to as the “attribution” or “conduit” principle.
The changes proposed by the DTC include maintaining the current levels of tax for trusts, that is, 41% for income and the effective rate of 27.31% for capital gains. It also recommends that the deeming provisions in Sections 7 and 25B that allow for the attribution rule should be repealed insofar as they apply to South African resident trusts. In other words, the income would no longer be taxed at the lower rate in the hands of the beneficiaries, but at the higher rate in the trust itself.
The rationale behind the recommendation is that the attribution rule is not being used for what it was originally intended; a tax antiavoidance measure. Instead it is being employed for the reverse purpose of avoiding the payment of tax. Assets are also commonly transferred to trusts where the transfer consideration remains outstanding by way of an interest free loan account. The trust then repays the loan over time as cash becomes available, the effective result being the gradual dissipation of the taxpayer’s estate.
The proposals by the DTC are just recommendations at this stage and taxpayers should therefore give careful consideration to their own particular circumstances before restructuring their affairs. While the tax advantage of the attribution rule is a key factor for making use of a trust, it is not the only factor. There are many other reasons why a trust may be utilised, such as:
Protecting assets from those who are unable or unwilling to look after the assets themselves;
Allowing for the seamless transfer of assets from one generation to the next; or
The protection of assets from creditors.
The DTC recognises the farreaching implications of repealing the attribution provisions, and therefore proposes an extensive consultative process before making any changes, which changes will not be implemented before March 2016.
Palmer, is a director in the commercial department at Garlicke & Bousfield. Call him at 031 570 5496 or 083 637 1868, or e-mail graeme.palmer@gb.co.za NOTE: This information should not be regarded as legal advice and is merely provided for information purposes.