Taxation of Trusts

PIC1In the budget speech during February 2013 the minister of finance mentioned that the taxation of trusts will come under review to control abuse. In the 2013 budget review published by National Treasury the following was said regarding the taxation of trusts.

To curtail tax avoidance associated with trusts, government is proposing several legislative measures during 2013/14. Certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their flexibility and flow-through nature. Also of concern is the use of trusts to avoid estate duty, which will be reviewed. The proposal will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities.

The proposals are as follows:

  • Discretionary trusts should no longer act as flow-through vehicles.  Taxable income and loss (including capital gains and losses) should be fully calculated at trust level with distributions acting as deductible payments to the extent of current taxable income.  Beneficiaries will be eligible to receive tax-free distributions, except were they give rise to deductible payments (which will be included as ordinary revenue).
  • Trading trusts will similarly be taxable at the entity level, with distributions acting as deductible payments to the extent of current taxable income. Trusts will be viewed as trading trusts in that they either conduct a trade or, if beneficial, ownership interests in these trusts are freely transferable.
  • Distributions from offshore foundations will be treated as ordinary revenue.  This amendment targets schemes designed to shield income from global taxation.

From the wording above it is not clear what is meant by Treasury. To date no further information or explanations could be obtained from Treasury or other experts as to what the exact interpretation of the wording in the budget review entails.

Firstly the statement was made that there is concern about the use of trusts to avoid estate duty, and it will be reviewed. It is contrary to the information contained in the budget proposals of the previous year, where it was mentioned that consideration will be given to the abolishment of estate duty, due to certain duplication with Capital Gains Tax. This topic has been a discussion point for more than twenty years, and was also considered by the Margo Commission and the Katz Committee. Although this statement should not be ignored, nothing has materialised so far.

The paragraph dealing with discretionary trusts basically states that the flow-through (conduit) principal will no longer apply, but that distributions will act as deductible payments to the extent of current taxable income. The paragraph goes further to state that beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments, which will then be included as ordinary revenue in the hands of the beneficiaries.

We interpret this paragraph to mean that any income in the trust that is distributed to beneficiaries in terms of the trust deed, will be taxable in the hands of the beneficiaries and any income not so distributed will be taxable in the trust. There is very little difference between this and the existing conduit principle. The exception may be that the income might not retain its identity as is the case with the current conduit principle.

It is also not clear why a difference is made between trading trusts and discretionary trusts, as the same tax dispensation will apply to both. The paragraph that deals with distributions from off-shore foundations speaks for itself.

The proposals in the budget review raised questions with various persons and institutions which can also be fuelled further by statements in the media. Although the proposals are aimed at preventing the misuse of trusts for avoidance of tax, it does not seem to differ materially from the current dispensation. As previously mentioned this topic has been raised from time to time, but it did not progress beyond proposals. We recommend that cognisance should be taken of the proposed developments, but decisions should only be made once more comprehensive information is available.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.




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IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.


Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.


Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.


Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.