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Taxation Semester 2 > Trusts > Flashcards

Trusts Flashcards

1
Q

Advantages on trusts

A
  • On disposal to trust: CGT, STT, Transfer duty
  • The growth in the asset from date of transfer to date of his death accrued to the trust
  • No estate duty in a trust (unless it is revoked by taxpayer)
  • Special trust: Protection of minor beneficiaries
  • Protect assets from creditors
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2
Q

Disadvantages on trusts

A
  • Loss of control as property is now under jurisdiction of trustees (discretionary trust)
  • Attribution rules for income and CGT
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3
Q

Discretionary Trust (no vested rights for beneficiaries)

A
  • Beneficiaries of the trust do not have a vested rights to accumulated income of trust
  • Any income retained in trust will be taxed in hands of relevant donor ito s7(5)
  • s7(3) will apply iro donation to minor
  • s7(8) will apply to NR and taxed in donors hands
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4
Q

General notes on Trusts

A
  • Vesting of interest by trustees triggers disposal of an asset CGT
  • Annuity paid to beneficiary in terms of testamentary trust is deemed to accrue to them in terms of s25B(1)
  • If you do not have a vested right, the retained interest is taxable in hands of trust
  • Trust can only make a donation if they donate to anyone who is not a beneficiary
  • Donor can be a beneficiary or trustee but not both
  • Trust can be subject to OECD and DTA
  • A partnership is not a separate legal entity
  • YoA is 28/29 Feb
  • Beneficiaries of a trust are taxed on trust income if they have a vested right to trust income
  • Trust income to which a beneficiary has vested right that was not paid out and was invested by trustees for the benefit of beneficiaries accrues to beneficiaries
  • A trust is a person and taxpayers in their own right
  • There must be a casual connection between donation and income in question to put attribution rules in play so as to tax donor
  • Waiver of loan is effectively a debt reduction but excluded par 12A
  • No donations tax when trust donates to beneficiaries
  • If you’re CP to trust. The loss is ringfenced in terms of par 39 of the 8th schedule but may be deducted from capital gains in respect of disposals of same person
  • Beneficiaries are connected persons to the trust
  • The rates, taxes in trust follow the income

—————————————————

  • If trustees waive loan or have vested right Par 12A applicable
  • Since loan included in estate any debt reduction not subject to 12A

Tax trust if there is no vested right, no distribution and no donor

-Consider the dominant cause eg rental income or dividends etc and the source in terms of trusts

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5
Q

Donation to trust

Even if sold at MV on interest free account)

A
  • First establish the relationship of the donor to beneficiaries
  • The trust acquires asset at MV therefore step up in base cost
  • Trust responsible for transfer duty and STT
  • Interest arises by reason of a donation made by x hence s7 is of application as the provisions of s25B are subject to s7
  • s7(8) included in donors taxable income
  • With a donation to a trust, legal ownership of assets vest in trust and not beneficiaries
  • Donation of trust asset to beneficiary is exempt from donations tax. The donation of an asset to trust by donor is not exempt from donations tax
  • A resident major that is a beneficiary it will accrue to him s25B(1) . There are no provisions in s7
  • If beneficiary doesn’t have vested right provisions of s7(5) deem income to accrue to donor
  • An interest free loan is not a donation it is a disposition s7 and par 69 and 70 of 8th schedule. Treat the same way as donation. A limit could be applied to attribution of income
  • Max amount of income that could be attributed would be limited to market rate applied on outstanding loans
  • Sum of income under s7 and attributed gains cannot exceed benefit derived
  • s7C will apply
  • Deemed donation of interest not charged will be calculated by using official interest rate
  • Annual exclusion 100k and rate 20%

Trust implications: loan waived

  • When deceased is no more trust liability is waived at DoD as trust inherits the loan account
  • Par 12A N/A to the reduction of trust debt as the loan amount will be property of estate duty
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6
Q

Interest free loan s7C

A
  • It is not a donation it is other disposition
  • It results in the other party receiving a benefit and that benefit is “other disposition” and indicates a gratuitous element
  1. Loan, advance or credit
    - directly or indirectly provided to Trust that is a CP
    - Interest-free loan is a continuing donation s7
    - The interest-free loan is a continuing donation deemed made on the last day of YoA
    - Donation of farm idls disposal. Proceeds 70% MV

Donation to a trust

  • Donations tax
  • CGT
  • Effective cause of income being received and accumulated by trusts is a donation by TP
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7
Q

S7(3) Minor children

A
  • N/A if donor or parent is deceased
  • If made my grandparents

CGT: Par 69

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8
Q

S7(5)

A
  • Beneficiaries do not have a vested right
  • Any income retained in the trust in current YoA taxed in hands of relevant donor
  • There is a stipulation or condition
    CGT: Par 70
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9
Q

S7(8) Non resident beneficiaries

A
  • A non-resident will be taxed if s7 implications are not applicable. Meaning if there is no donation made i.e. asset was sold to the trust at market value.
  • Amount would have been included in income had they been a resident
  • Doesn’t matter if minor or major

CGT: Par 72

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10
Q

S25B

A
  • Income taxed true to it’s nature
  • Always apply it even if s7 applies. Subject to s25B
  • s25B(3) expenditure deductible in individual taxable income so under trust amount is nil
  • s25B(4)limited to income
  • s25B(5) Expenditure or allowances in excess go back to trust
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11
Q

Losses and Trusts

A
  • Par 80 of 8th schedule a capital loss cannot be distributed on vesting of assets in trust beneficiaries
  • Par 39 ring-fence capital losses arising on the disposal of assets between connected persons
  • Capital loss is always retained in the trust
  • Par 70 cannot attribute a capital loss retained by trust to donor
  • Capital loss is retained in trust
  • Deduction in hands of beneficiaries are limited to income distributed. Losses cannot be transferred to beneficiaries
  • Excess of distributed deduction and allowances may not create an assessed loss. Tax effect is that trust has neither taxable income nor loss
  • Any subsequent excess is c/f for use against beneficiaries income from trust YoA
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12
Q

Distribution by Trustees( discretionary interest by beneficiaries)

A
  • In terms of s25B the net rentals are deemed to accrue to xxx unless provisions of s7 apply (s25B(1), (2) read with s25B(3)
  • CGT is applicable when you’re the owner of the asset so the beneficiaries will be liable for CGT
  • Distribution paid by way of annuity and retain their identity of interest, dividend and rentals
  • S7 may be of application to interest and dividend if you donate shares and interest
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13
Q

Types of truts

A
  1. Ordinary trust flat rate at 45%, 80% CGT
  2. Special trust (taxed as natural person)
    - No rebates
    - No exemptions
    - CGT at 40%
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14
Q

Taxes to be considered

A

Acquire assets:

  • Recoupment
  • Capital gains
  • Estate duty
  • Donations tax

Income gains or vesting:

  • Normal tax
  • Capital gains
  • Transfer duty
  • STT

Trust is revoked:

  • Capital gains
  • Transfer duty
  • STT
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15
Q

How to get assets in a trust

A
  1. Sell the assets at arm’s length
  2. Donate assets to a trust
  3. Bequeath assets at DoD
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16
Q

Conduit principle

A
  • Income retain nature as long as it is distributed to beneficiaries in the same YoA
  • Except annuities of local dividends, local interest paid to NR s10)2)(b)and foreign dividends s10B(2)
17
Q

Income paid by an annuity

A
  • s10(2)(b) (income first accumulates in trust then paid as annuity) and 10B(5) (foreign) they disallow amounts paid as an annuity.
  • s10(3)(a) if there is an obligation made out of payments no exemptions for a person paid out of profits
18
Q

S7

A
  • Applies to income if capital in nature take it to CGT par 69-72
  • Taxed in the hands of the donor
  • Can only apply if the donor is alive
  • Consider a donation, settlement and other disposition
19
Q

s7C is applicable, Advise donor of possible solutions to ensure it is not applicable

(TAX planning)

A
  1. Obtain loan
    - Instruct trust to obtain loan from bank
    - Interest incurred by trust, in production of income thus s24J deduction
  2. Write off loan balance
    - This will constitute a donation to value of loan amount
    - Donation tax payable on loan balance
20
Q

Sale of assets to the trust

A

-Sale of the commercial property at below mv Trust is a disposal of property for inadequate consideration and is deemed to be a donation in terms of section 58 of the Income Tax Act.
-The commercial building is presumed to have been held by Individual as a capital asset and proceeds on disposal
will be capital in nature.
-The proceeds and base cost for CGT purposes would require adjustment for the recoupment and allowances
respectively

21
Q

Estate duty to trust

A

-A trust never ‘dies’ and therefore cannot be subject to Estate Duty
- The trust is a discretionary trust as all the beneficiaries have contingent rights to both the income and capital
of the trust
-Beneficiary of the trust and he is therefore competent to dispose of the property for his own benefit
-Therefore all the property of the trust is deemed property of X’s estate for estate duty purpose
-Submitted that the section 4(e) deduction is not available as X has always been ordinarily resident in the Republic. Furthermore he (and the trust) ‘acquired’ the shares’ by donation from wife who was ordinarily resident at the time of the donation

22
Q

Individual Trust and Deceased estate: Debt waiver

A

Individual:

  • Loan account is asset of estate include at MV
  • No capital gain or loss on deemed disposal at DoD since MV at DoD = BC

Deceased Estate:

  • Loan deemed acquired at BC = MV at DoD
  • Capital loss on waiver since P= 0
  • Individual (Estate) and Trust are CP
  • Disregard capital loss ito par 39 and 56

Trust
- Waiver is debt reduction excluded Par 12A. Capital gain excluded

23
Q

Trading income to trust after person dies

A
  • It is an ascertained heir and has vested rights to assets and income
  • s25(1)
  • s25(2)
24
Q

Disposals and attribution amount if there is a donation

A
  • The disposal resulted in donations tax of xxxxx (cost less mv)
  • portion that is donation = xxxxx/ mv
  • PAR 73 limit the income
  • Attribution amount is given amount s7(3)/s7(8) (Their income)*xxx/mv
  • Balance = s7(5)
  • Balance amount in term of s7(5) *xxxx/mv

Taxation Semester 2 (9 decks)

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