A certain amount of administrative responsibility is created and certain requirements must be adhered to when operating a trust. These administrative burdens include:
* The compilation and retention of trust records from inception of the trust to at least five years after the trust has been deregistered.
* Trustees’ minutes and resolutions about all transactions must be drafted and retained.
* The maintenance of a separate bank account for all monies flowing in and out of the trust. This is a requirement of the Trust Property Control Act (section 10).
* The maintenance of an asset register.
* Adherence to any other specific administrative requirements stipulated in the trust deed. Ensure that you understand the trust deed, together with the duties that are expected of you.
It is important to demonstrate that the trust is managed as a separate entity to the founder and its beneficiaries. If there are no resolutions, minutes, or a separate bank account, the South African Revenue Service (Sars) and creditors, including, for example, a soon-to-be-ex-spouse, may request that the court declares the trust your alter ego, resulting in the disregard of the trust. This “cost” may be significantly higher than the effort required to administer the trust.
The government has introduced all sorts of punitive tax measures to discourage people from using trusts. These measures are, however, insignificant when compared with the potential savings in estate duty on your death, as well as the benefit of protecting your assets. Although higher tax rates for trusts apply to income and capital gains retained by the trust, the trust is always the taxpayer of last resort.
In summary, trust taxes are payable as follows:
* If a connected person has made a donation or soft/interest-free loan to the trust, all income generated resulting from such a donation or gratuitous disposition will be taxed in the hands of such person until his/her death. Similar anti-avoidance provisions for capital gains tax (CGT) exist.
* If these anti-avoidance provisions do not apply, the trustees may distribute income or capital gains to the beneficiaries (in the same financial year) and use the conduit principle to have it taxed in the hands of the beneficiaries at potentially more favourable tax rates.
* If income or capital gains are not distributed to the beneficiaries, only then will the income or capital gains be taxed in the hands of the trust.
* CGT is payable in the trust at an effective rate of 36%, and there are no abatements, similar to that for natural persons.
It is interesting to note that, with the increase in the dividend tax rate from 15% to 20% for companies, the effective tax rate on an asset sold by a company and the profits being distributed to its shareholders is now more than a trust, being 36% for a trust versus 37.92% for a company (22.4% CGT and 20% dividend tax on the dividend declared). Income retained in the trust is taxed at 45%.
However, the accurate application of the anti-avoidance provisions and conduit principle can facilitate overall tax savings instead of additional tax. Proper planning and execution must take place within a trust if any potential tax consequences are to be proactively managed.
Consequences of trusteeship
It is important that trustees play an active and effective role in the administration of the trust. With reference to the onerous duties of trustees, a person is required to understand the personal risk involved in taking up trusteeship. The penalties for absentee or “puppet” trustees can be severe.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner and the founder of Trusteeze, a professional trust practitioner.