Each day now we are reminded of the extent of the “bailout” packages that have become necessary to save our State-Owned Entities (SOE’s).  Our new SARS commissioner has budgeted to collect R 1.4 trillion in an attempt to limit the amount that the country may need to borrow to fund this extraordinary expenditure.

Given the current economic environment, the high levels of unemployment and the resultant very small tax base, it is likely that the only option the fiscus has to fund its overburdened expenditure requirements is to turn their attention to “those who are more fortunate than others”.  Taxpayers who feel that they have been paying too much tax anyway, have tended to seek refuge in the establishment of Trusts.  Trusts have traditionally provided options enabling the donor / founder to limit the amount of tax that he / she has had to pay.

SARS are clearly aware of the potential of increasing state revenue and appear to be directing their attention to investigating Trusts in particular.

Four issues relating to the taxation of Trusts are worth mentioning:

  1. Section 7C of the Income Tax Act has been introduced and has the effect of requiring the beneficiaries who “lend” money to their Trust without requiring that interest be paid on the money so lent, to pay donations tax on this gratuitous arrangement.
  2. An earlier amendment to the Act has had the effect of denying the tax advantages of the distribution of a capital gain intended to be taxed in the hands of the beneficiaries of a secondary Trust.
  3. Whereas previously SARS, in assessing trust related submissions have tended to ignore the content of the underlying Trust Deed, they now appear to be doing a far more in-depth analysis of Trust Deeds in order to establish who the true, intended beneficiaries are.
  4. SARS appear to be reopening “cold” cases. Do not be surprised therefore if you are confronted by questions relating to a previously filed and assessed submission.

While the effects of Section 7C (refer to 1 above) and the tax efficient distribution of capital gains (refer to 2 above) can be managed to avoid a significant downside to tax planning, it is most important that you review the following in relation to your Trust:

  • Make sure your Trust Deed conveys your intentions insofar as your nominated beneficiaries are concerned.
  • All Trust resolutions must convey the correct intentions of the founder / Trustees and should be properly signed and dated. An incorrectly dated resolution could have a significant impact on any tax that becomes payable.
  • Ensure that the Trustees of your Trust have the sole discretion as to the distribution of income and capital.
  • If your Trust is an operating Trust and employs persons, particularly if these persons happen to be family members of the donor / founder, make sure that the necessary employment contracts have been put in place.

Clearly your Trust Deed, its contents and its complexities could have far-reaching effects from a legal, an estate duty and a tax point of view.  It is most important therefore that if you are unsure of your Trust’s status, and to make sure that you do not fall foul of SARS’ ever advancing investigative skills, that you seek professional advice.

Remember, tax law is changed regularly.  You should regularly have the content of your Trust Deed reviewed.