*This content is brought to you by Brenthurst Wealth
By Brian Butchart*
Is a trust still an appropriate entity for your asset(s) based on your specific circumstances?
In many instances a trust has been an effective estate planning vehicle to reduce your personal estate and therefore estate duty, by transferring assets to a trust. It is also an attractive vehicle to peg the value of an asset in a trust, on date of transfer, with all future growth accumulating in the trust outside of your estate, thereby reducing estate duty on any future growth of those assets. There are also other benefits such as protection of assets from creditors and beneficiaries, ease of administration upon death and estate planning for future generations.
However recent changes to the income tax act, have important consequences for anyone who transferred assets into a trust and may require some reconsideration in certain instances.
The Taxation Laws Amendment act, 2016 introduced section 7C.
Section 7C was promulgated on 22 January 2017 and the section is effective 1 March 2017.
The section has been introduced to prevent trusts from being used to avoid or reduce estate duty and donations tax.
This section has important consequences for anyone who transferred assets to a trust without being paid for the asset.
It was common practice to sell assets to a trust on an interest free loan basis, usually because the trust had no liquidity and because the seller did not want to pay tax on the interest. The loan was written off over time by reducing the loan by the annual donations allowance of R100,000 per annum, until the trust owned the asset in it’s entirety. The sale of the asset on this basis avoided both donations and income tax.
SARS has deemed the practice of not charging interest on such loan accounts equivalent to a donation. As such lenders are now required to charge interest of at least the repo rate (currently 6.75%) plus 1%, or else pay donations tax.
Donations tax is calculated at a flat 20% of the value of the asset above the annual donation allowance of R100,000 per annum payable by the donator.
Loans of R1,290,000 or less will not attract donations tax, as a 7.75% interest rate applied to R1,290,000 is equivalent to the annual donations allowance of R100,000. That is assuming you have not already made any other donations in this tax year. Between spouses you can double the loan to R2,580,000 before paying any tax on interest earned. Any larger loans, will however attract donations tax at a rate of 20% on the value of the loan higher than R1290,000, if no transactional payment of the interest after the annual donations allowance is paid to the lender. If the interest is paid, the lender will pay income tax on the interest earned.
This section applies irrespective of when the loan was made, whether it was made prior to, on or after the effective date is irrelevant. It applies retrospectively to loans made prior to 1 March 2017, however the actual donation will be deemed to take place on the last day of any given tax year. Therefore, any donations in the 2017/2018 tax year will be deemed to be donated 28 February 2018 and any donations tax will be payable 31 March 2018.
This does not apply to all trusts and would typically apply to family trusts (discretionary inter vivos trusts) set up during your lifetime.
When reviewing how this impacts your trust, one should also consider the tax implications for a trust which have increased substantially over the years, taxed at a flat tax rate of 45% on any income and an effective 36% capital gains tax rate. This together with the reasons for establishing the trust in the first place may need to be reviewed to determine suitability. It is however worth noting that endowments can offer some relief for the taxation of trusts in terms of income and CGT as long as the beneficiaries are all natural persons.
Although there are options to counter the consequences of section 7C there is no standard solution and each client’s circumstances will need to be considered in order to determine suitability.
It is our view that one should consider all the implications of an existing or new trust structure in light of these tax changes. If a trust was created simply to save taxes it may not serve that purpose any longer.
Depending on the reasons for establishing a trust and the value it offers, considering these recent changes, it may be worthwhile considering more cost and tax effective alternatives.
I would however suggest seeking advice from a fiduciary/tax specialist to ensure that all consequences of these tax changes as well as any alterations to any existing trust structures are clearly understood, in order to determine if your trust is still an effective solution for your personal circumstances.
- Brian Butchart is a CFP® professional and MD for Brenthurst Wealth Management.
