What are the tax consequences for an ownership trust?

Do you know when will a trust or its beneficiaries be liable to pay tax?

Trusts have traditionally been instrumental for tax planning purposes. As much as it offers a taxpayer the additional benefit of asset separation from an insolvency perspective, trusts can also reduce the effective rate of interest to the extent that income was diverted to lower income earners.

Depending on the circumstances, the income of a trust can be taxed in the hands of the Beneficiary, the Donor or the Trust.

In this article we specifically discuss the tax consequences for Ownership Trusts.

 What is an ‘ownership trust’? 

An ownership trust is created when the founder transfers ownership of assets or property to a trustee(s) to be held for the benefit of the defined or determinable beneficiaries of the trust. The trust assets in an ownership trust vest in the hands of the trustees and not the beneficiaries themselves. The rights of the beneficiaries in respect of the trust assets are usually determined by the trust deed.

When will a trust and/or beneficiaries be liable to pay tax? 

A trust does not have legal personality except in certain circumstances such as for tax purposes. A trust can be liable to pay tax in the following circumstances:

  • Donation Tax

According to sections 54 to 64 of the Income Tax Act of 1962, donation tax is payable at a flat rate of 20% on the value of property disposed of by way of donation. The first R100 000 of the value of property or assets donated each year shall be exempt from donation tax.

  • Income Tax

Section 25B of the Income Tax Act of 1962 and paragraph 80 of the Schedule 8 recognise the application of the conduit principle. The principle provides that income received by or accrued on behalf of a beneficiary who has a vested right to such an amount during each year shall be deemed to be an amount which has accrued to the beneficiary and shall be taxed in the hands of the beneficiary.

  • Dividend Tax

According to section 64E (1) of the Income Tax Act of 1962, dividend tax is imposed at a rate of 20% on the receipt of dividends. Dividend tax is a withholding tax and should be withheld from dividend distributions and paid to SARS by the company. However, the ultimate responsibility for paying dividend tax would be that of the beneficial owner. The beneficial owner is defined as the person who is entitled to the benefit of the dividend attaching to a share.

  • Capital Gains Tax

When an asset is disposed of, Capital Gains Tax (CGT) may apply. When a trust disposes of the assets held in the trust, the full capital gain or loss values are not taxable, only part thereof. The capital gain is multiplied by the inclusion rate and the result is added to the taxable income of the trust. The current inclusion rate of a trust is 80%.  In certain circumstances, such as employee share incentive programmes housed in a trust, the beneficiaries may be liable for CGT in terms of the conduit principle.

Non-compliance

It must be noted that, amongst others, failure to register the trust for tax, submit returns and prepare financial statements can lead to penalties, interest and other sanctions in terms of the Income Tax Act of 1962.  Even though a trust does not constitute a legal entity, it is considered a “person” for the purposes of the Income Tax Act of 1962 and can be subject to tax.

SERR Synergy specialises in unique ownership solutions, including the structuring of ownership trusts, collective ownership structures as well as family trusts. It is important to note that B-BBEE ownership trusts are partially NON-discretionary (compulsory or vesting trust) and have their own unique recognition.

About the Author: Rozanne van Heerden obtained her LLB from the University of South Africa and was admitted as an attorney of the High Court of South Africa in 2016. Rozanne joined SERR Synergy in November 2017 and forms part of the Trust and Ownership department.