Reforming the taxation of trusts: a long time coming
01 March 2013
Posted by: SAIT Technical
By Johan van der Walt (Cliffe Dekker Hofmeyr Tax Alert)
High Net Worth Individuals
use of trusts have been in SARS's sights for quite some time.
Legislative proposals will bring about certain fundamental changes to
taxation of trusts. Proposals include that discretionary trusts would no
longer be allowed to act as
Net Worth Individuals (HNWI's) and their use of trusts for tax and estate
planning purposes go hand in hand. A trust is often praised for its
"flexibility". Open any financial planning periodical and there's
bound to be an article on the virtue of trusts.
concept originated in English law. It has been called "the most
distinctive and creative achievement of English jurisprudence." It
originated during the 12th and 13th century Crusades. English land ownership
was a feudal system. A Crusader leaving England would grant ownership of his
estate to a trusted acquaintance upon the understanding that his land would be
restored to him upon his return. The King's Courts regarded the Crusader's land
as belonging to the trustee who had no obligation to return same. The returning
Crusader could, however, petition the King who referred such disputes to the
Lord Chancellor. The Lord Chancellor decided matters according to his
conscience and so developed the notion of "equity." Over time, the Lord
Chancellor's court continuously recognised the returning Crusaders' claims. The
principle developed that the legal owner (the "trustee") only held
the land for the benefit of the original owner (the "beneficiary")
until his return, at which stage the trustee then had to return the land. The
term "use of land" was coined and eventually developed into the trust
Local tax principles
relating to trusts have been fairly static over the recent past. The fact that
trust income attracted a 40% tax rate (and an effective CGT rate of 26.7%) was
probably the strongest indicator that the fiscus had a jaundiced view of
tax planning via a trust.
The topic of trust
reform first featured in the 2012 Budget. Mid- 2012 SARS announced that
research showed that a potentially significant number of HNWI's "...
abused trusts to hide their tax liability." Start April Mr. Bob Head
joined SARS as special adviser to the Commissioner. In a Business Day article
titled "SA strikes right tax balance to address its challenges" (2
April 2012) he wrote: "Sadly I have never inherited anything and
whatever I have I made. I have seen a lot of it disappear in tax. That is just
the way it is. I find inherited wealth more difficult to stomach and when the
income on that wealth is hidden in trusts and structures to avoid tax, then I
really do see red."
So HNWI's and their
use of trusts have been in SARS's sights for quite some time. The SARS
Strategic Plan (2012/13 – 2016/17) stated that there was a "compliance
risk posed by high-net worth individuals and the use of trusts to conceal their
income." It said that under-declaration of income by persons in the HNWI
category (annual income in excess of R7m, alternatively R75m in assets) was
wide-spread with "only a fraction" actually declaring their income
to SARS. The Strategic Plan announced that trust reform would be prioritised.
Although there was no detail, it sounded ominous.
Well SA taxpayers now
have the detail.
referred in his 2013 Budget Speech to "... various measures proposed to
protect the tax base and limit the scope for tax leakage and avoidance."
One such measure was that "... the taxation of trusts will come under
review to control abuse."
In Chapter 3 (p 54)
of the 2013 Budget Review the following detail appears:
aspects of local and off-shore trusts have long been a problem for global tax
enforcement due to the flexibility and flow-through nature of trusts;
use of a trust to avoid estate duty has also been of concern and will be
legislative proposals to come will not impact the legitimate needs of minor
children and people with disabilities;
legislative proposals will bring about certain fundamental changes to the
taxation of trusts:
Discretionary trusts would no longer be allowed to act as
flow-though vehicles. Taxable income and loss (including capital gains and
losses) would thus be fully calculated at trust level with distributions to
beneficiaries acting as deductible payments to the extent of current taxable
income. Beneficiaries will be eligible to receive tax-free distributions,
except where they give rise to deductible payments (which will be included as
Trading trusts will
be taxable at the entity level, again with distributions acting as deductible
payments to the extent of current taxable income. A trust will be a "trading
trust" if it conducts a trade or if beneficial ownership interests in such
a trust are freely transferable;
received from offshore foundations will be treated as ordinary revenue. This
amendment is aimed at schemes designed to shield income from global taxation.
The HNWI constituency was spared a
wealth tax and there has been no increase in the maximum marginal tax rate.
However, the envisaged tax amendments
will impact the SA trust landscape and could derail many a carefully crafted
least, no-one can complain that no warning had been given