Tax 4: Trusts Flashcards
What are 2 types of trust?
inter vivos and testamentary
What are the types of inter vivos or testamentary trusts?
vesting and discretionary
Who are the 4 connected persons iro a trust?
testator/donor/founder;
trustees;
trust;
beneficiaries
What are 3 benefits of a trust?
for estate planning,
conduit principle,
income splitting
What is the conduit principle?
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
What is the basic principle of taxing a trust and why?
always try to tax trust LAST, very high tax rate = 40%
T/F: A trust is a legal entity.
F: is a person (NOT a natural person)
_____ administer the trust on behalf of the _________ ito the ________.
trustees;
beneficiaries;
trust deed
A trust can be tax-effective if _________ rules do not apply.
attribution
For whom is a special trust created?
mentally ill person who cannot manage his own affairs
How is a special trust’s tax treated?
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.
What is the CGT inclustion rate for a trust?
66.60%
What is a vesting trust?
beneficiaries are UNCONDITIONALLY entitled to received income, capital gain from a trust –> i.e. they are taxed
Who is taxed ito a capital gain for a vesting trust?
- in the hands of person to whom it’s attributed (if attribution applies)
- beneficiary (if not attribution)
- trust itself (no beneficiary has a vested right, no attribution)
Conduit Principle: “Income received by/accrued ON BEHALF OF a beneficiary will be taxed in the hands of the _________. That income will _____ its nature.
beneficiary
retain
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?
attribution, conduit
donation, gratuitous
Donor is taxed!
What is an example of a gratuitous disposition?
assets sold to trust on a interest free loan
What is a special trust?
A trust created for a mentally ill person who cannot manage his own affairs
What are CGT benefits of a special trust?
Same as for an individual: 33.3 % inclusion rate annual excl of R30 000 Same rate as natural person primary residence exclusion etc.
What is a discretionary trust?
opposite of vesting trust
beneficiaries NOT unconditionally entitled to income
on discretion of trustees etc.
Section 7(5) counts for a _______ trust.
discretionary
Section 7(5) says that income is to be ______ in the trust until the happening of some ______ ito the _______.
retained, event, trust deed
(condition is met)
The “event” could be anything exercised at the trustees’ discretion!
What is the exception to Section 7(5)?
beneficiary has a VESTED right to the income
e.g. beneficiary received income only when he turns 21
Revocable vesting: “Donor cedes ______ to another”.
investment income
What is seen as investment income ito revocable vesting?
rental, interest, royalties or similar (all ceded to another)
Section 7(7): “The ____ is taxed if he retains the right to regain the asset in the future.”
donor
If a non-res earns income as a result of a donation made by a resident, who will be taxed and how?
the resident, incl in gross income
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.
False, it was already a disposal at the DATE IT BECAME VESTED to a beneficiary! (which ever comes first)
What are three ways of disposing of trust assets (for CGT purposes)?
- trustee SELLS trust asset to a 3RD PARTY
- trustee DISTRIBUTES the asset to a beneficiary (without a vested right in the asset)
2a. trustee vests a right to a beneficiary - beneficiary SELLS his vested right to someone else
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?
Normal CGT apply to the BENEFICIARY
With a discretionary trust the assets belong to the ____.
trust
When does disposal for CGT purposes take place with a discretionary trust?
- asset is DISTRIBUTED/TRANSFERRED to the beneficiary
2. asset is SOLD to a 3rd party
When an asset is sold to a beneficiary, it is deemed sold at ____.
Why?
MV
Connected persons
Capital losses between connected persons are _____.
clogged
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 _____.
MV, connected person (to the trust)
beneficiary
If a trust sells an asset (to a 3rd party) that was vested in a beneficiary, the ________ is taxed.
beneficiary
If a trust sells an asset that only becomes vested in the beneficiary in the following year, the _____ is taxed.
trust
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.
False, treated as a normal trust for CGT purposes
The attribution rule allows for the ____ to be taxed.
donor
If no attribution applies when a capital gain arises and there is NO vested right in this asset, the ____ will be taxed.
trust
If a minor child has a vested right in a capital asset and it is disposed of by the trust, the _____ will be taxed.
attribution - the donor/testator
A beneficiary’s interest in a discretionary trust is deemed as ____. Unless the the trustees distribute that asset to the beneficiary.
nil (i.e. the base cost)
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.
revoke
confer
donor
