Tax 4: Trusts

Question 1

What are 2 types of trust?

Answer 1

inter vivos and testamentary

Question 2

What are the types of inter vivos or testamentary trusts?

Answer 2

vesting and discretionary

Question 3

Who are the 4 connected persons iro a trust?

Answer 3

testator/donor/founder;
trustees;
trust;
beneficiaries

Question 4

What are 3 benefits of a trust?

Answer 4

for estate planning,
conduit principle,
income splitting

Question 5

What is the conduit principle?

Answer 5

Sec 25B: income allocated or paid to beneficiary
in yr that income is received by or accrued to trust –> beneficiaries deemed to have receipts or accruals for tax;

income retains its nature, except for ANNUITY

Question 6

What is the basic principle of taxing a trust and why?

Answer 6

always try to tax trust LAST, very high tax rate = 40%

Question 7

T/F: A trust is a legal entity.

Answer 7

F: is a person (NOT a natural person)

Question 8

_____ administer the trust on behalf of the _________ ito the ________.

Answer 8

trustees;
beneficiaries;
trust deed

Question 9

A trust can be tax-effective if _________ rules do not apply.

Answer 9

attribution

Question 10

For whom is a special trust created?

Answer 10

mentally ill person who cannot manage his own affairs

Question 11

How is a special trust’s tax treated?

Answer 11

as per individual’s tax – same for CGT e.g. 33.3% inclusion rate, annual exclusion of R30 000, primary residence exclusion, personal-use assets etc.

Question 12

What is the CGT inclustion rate for a trust?

Answer 12

66.60%

Question 13

What is a vesting trust?

Answer 13

beneficiaries are UNCONDITIONALLY entitled to received income, capital gain from a trust –> i.e. they are taxed

Question 14

Who is taxed ito a capital gain for a vesting trust?

Answer 14

1. in the hands of person to whom it’s attributed (if attribution applies)
2. beneficiary (if not attribution)
3. trust itself (no beneficiary has a vested right, no attribution)

Question 15

Conduit Principle: “Income received by/accrued ON BEHALF OF a beneficiary will be taxed in the hands of the _________. That income will _____ its nature.

Answer 15

beneficiary

retain

Question 16

Section 7 deals with ______ and overrides the ______ principle. This applies “by virtue of any ______, settlement or _______ disposition made by any person”.
Who is then taxed?

Answer 16

attribution, conduit
donation, gratuitous
Donor is taxed!

Question 17

What is an example of a gratuitous disposition?

Answer 17

assets sold to trust on a interest free loan

Question 18

What is a special trust?

Answer 18

A trust created for a mentally ill person who cannot manage his own affairs

Question 19

What are CGT benefits of a special trust?

Answer 19

Same as for an individual:
33.3 % inclusion rate
annual excl of R30 000 
Same rate as natural person
primary residence exclusion etc.

Question 20

What is a discretionary trust?

Answer 20

opposite of vesting trust
beneficiaries NOT unconditionally entitled to income
on discretion of trustees etc.

Question 21

Section 7(5) counts for a _______ trust.

Answer 21

discretionary

Question 22

Section 7(5) says that income is to be ______ in the trust until the happening of some ______ ito the _______.

Answer 22

retained, event, trust deed
(condition is met)
The “event” could be anything exercised at the trustees’ discretion!

Question 23

What is the exception to Section 7(5)?

Answer 23

beneficiary has a VESTED right to the income

e.g. beneficiary received income only when he turns 21

Question 24

Revocable vesting: “Donor cedes ______ to another”.

Answer 24

investment income

Question 25

What is seen as investment income ito revocable vesting?

Answer 25

rental, interest, royalties or similar (all ceded to another)

Question 26

Section 7(7): "The ____ is taxed if he retains the right to regain the asset in the future."

Answer 26

donor

Question 27

If a non-res earns income as a result of a donation made by a resident, who will be taxed and how?

Answer 27

the resident, incl in gross income

Question 28

T/F: A distribution of a trust asset (by a trustee) to a beneficiary with a vested right in the asset is seen as a disposal for the trust.

Answer 28

False, it was already a disposal at the DATE IT BECAME VESTED to a beneficiary! (which ever comes first)

Question 29

What are three ways of disposing of trust assets (for CGT purposes)?

Answer 29

1. trustee SELLS trust asset to a 3RD PARTY 2. trustee DISTRIBUTES the asset to a beneficiary (without a vested right in the asset) 2a. trustee vests a right to a beneficiary 3. beneficiary SELLS his vested right to someone else

Question 30

A trust holds an asset on behalf of a beneficiary with a vested right in the asset. Who is taxed when the the asset is disposed of?

Answer 30

Normal CGT apply to the BENEFICIARY

Question 31

With a discretionary trust the assets belong to the ____.

Answer 31

trust

Question 32

When does disposal for CGT purposes take place with a discretionary trust?

Answer 32

1. asset is DISTRIBUTED/TRANSFERRED to the beneficiary | 2. asset is SOLD to a 3rd party

Question 33

When an asset is sold to a beneficiary, it is deemed sold at ____. Why?

Answer 33

MV | Connected persons

Question 34

Capital losses between connected persons are _____.

Answer 34

clogged

Question 35

When an asset is transferred to a beneficiary, it is disposed at ____ because the beneficiary is a ______. This disposal is taxed in the hands of the _____.

Answer 35

MV, connected person (to the trust) | beneficiary

Question 36

If a trust sells an asset (to a 3rd party) that was vested in a beneficiary, the ________ is taxed.

Answer 36

beneficiary

Question 37

If a trust sells an asset that only becomes vested in the beneficiary in the following year, the _____ is taxed.

Answer 37

trust

Question 38

T/F: A testamentary trust created for relatives of the testator and the youngest beneficiary is less than 18 years old, it is a special trust.

Answer 38

False, treated as a normal trust for CGT purposes

Question 39

The attribution rule allows for the ____ to be taxed.

Answer 39

donor

Question 40

If no attribution applies when a capital gain arises and there is NO vested right in this asset, the ____ will be taxed.

Answer 40

trust

Question 41

If a minor child has a vested right in a capital asset and it is disposed of by the trust, the _____ will be taxed.

Answer 41

attribution - the donor/testator

Question 42

A beneficiary's interest in a discretionary trust is deemed as ____. Unless the the trustees distribute that asset to the beneficiary.

Answer 42

nil (i.e. the base cost)

Question 43

Section 7 (6): "The donor may _____ or _____ the right to received income to someone else". The income is then deemed to be that of the ____ for as long as she retains this power.

Answer 43

revoke confer donor