Trusts

Question 1

What is a trust?

Answer 1

A trust is an arrangement through which control and ownership in property is by virtue of a trust deed made over or bequeathed to another person or persons (the trustees) for the benefit of the beneficiaries.

Question 2

Who is the donor is a trust?

Answer 2

The person who forms the trust by making over or bequeathing property to trustees.

Question 3

Who is the trustee in a trust?

Answer 3

The person who has bare ownership of the trust assets and who administers trust assets on behalf of the beneficiaries.

Question 4

Who is a beneficiary of a trust?

Answer 4

A person who has certain rights in terms of a trust deed in respect of the trust property.

Question 5

What is a trust deed?

Answer 5

The written document in terms of which a trust is established.

Question 6

What are the two types of trusts?

Answer 6

A testamentary trust: set up in terms of a will of a person which comes into effect after his or her death.
An inter vivos trust: set up during the lifetime of a person.

Question 7

What is a inter vivos trust?

Answer 7

Special type of contract where the creator of the trust(donor or founder) enters into a contract with trustees, where the donor donates or transfers assets to the trustee and requires the trustee to administer the assets on behalf of a group of beneficiaries which the donor specified.

Question 8

Usually a trust is a discretionary trust, what does it mean?

Answer 8

The beneficiaries are not entitled to any income or capital distribution unless the trustees in their discretion decide to make some distribution to the beneficiaries. The beneficiaries’ rights are therefore contingent. Once a distribution is made the income vests (belong) in the beneficiaries.

Question 9

What are the steps to calculate tax for trust?

Answer 9

1. Compile a table
2. Calculate the taxable income of the donors
3. Calculate the taxable income of the beneficiaries
4. Calculate the taxable income of the trust

Question 10

What does step1 compile a table entail?

Answer 10

1. Compile a table that summarizes the trust’s income for the current year
2. All distributions and vested rights are now allocated proportionally
3. Write next to the name of the beneficiaries, his status as a resident and indicate whether he is a minor
4. Any amount received by reason of an annuity is written obliquely so that one can remember that the annuity no longer qualifies for the general dividend exemption in terms of section 10(1)(k) but only section 10(1)(i)(xv)
5. The name of the person responsible for the income S a consequence of a donation, settlement or other disposition, must be clearly indicated on the table
6. Round off amounts to the nearest rand
7. One must always refer to the table every time an amount is used as income in a person’s tax calculation, and the relevant amount must be crossed out in the table.

Question 11

How do you complete step 2 calculation of the taxable income of the donors?

Answer 11

1. Account for all amounts to which the donors have a vested right
2. Examine the amounts actually received by them. Establish whether or not they are entitled to trustee remuneration and interest on a loan
3. Test for the application of section 7(2) to 7(8) one by one
4. Compare the amount included in terms of section 7(2) to 7(8) with the benefit given, and ensure that no limitation is necessary
5. Ensure that expenditure that had to be allocated has in fact been allocated and that the losses are correctly dealt with
6. If income has been paid out from capital of the previous year, it is not taxable, but test for the possible application of section 25B(2A) when it is paid from a non resident trust
7. When spouses are marries in community of property, divide the applicable passive income equally between the spouses
8. Give the donor the applicable interest and dividend exemptions

Question 12

How do you calculate the taxable income of the beneficiaries?

Answer 12

1. The beneficiaries should now only be taxable on all amounts that appear next to their names on the table that have not already been crossed out
2. Test whether there are any amounts to which they have vested right and which have not already been distributed
3. Ensure there is no residue of any amount limited by step 2.4 that must still be included in the taxable income of the beneficiaries
4. Ensure that expenditure that should have been allocated has been allocated and that losses have been correctly dealt with
5. If income from capital of the previous year was distributed, it is not taxable, but test for the possible application of section 25B(2A) if it is received from a non resident trust
6. Give the beneficiaries the applicable interest and dividend exemptions
7. When spouses are married in community of property, distribute the passive income equally between the spouses

Question 13

How to complete step 4 calculation of taxable income of the trust?

Answer 13

1. The trust will be taxable on everything that has not already been crossed out on the table.
2. The trust mat be done first or last, because with the assistance of the rules below, it is easier to identify on what amount the trust is liable to pay tax.
3. A trust mat be taxed maximally:
   
   • on the undistributed income
     
     • if the donor is dead
     • the income was not derived as a consequence of a donation, etc
   • where no one has a vested right to the income

Question 14

How is a inter vivos trust taxed?

Answer 14

An inter vivos trust is taxed subject to the provisions of section 25B and section 7 of the Income Tax Act. Founder could be liable until death then trust and beneficiaries are liable.

Question 15

How is a testamentary trust taxed?

Answer 15

A testamentary trust us traces on the income it retains and its beneficiaries are taxed on the income distribution. Either the trust or beneficiaries are liable.

Question 16

What does s25B(1) provide for amounts received by or accrued to or in favor of any person in his or her capacity as a trustee of a trust?

Answer 16

Any amount that has been derived for the immediate or future benefit of an ascertained beneficiary who has vested right to such amount during such year be deemed to be an amount which has accrued to the beneficiary otherwise be deemed to be an amount which has accrued to the trust.

Question 16

What does s25B(2) state in terms of acquired right of the beneficiary in consequences of the exercise by trustee?

Answer 16

Such amount is deemed to be derived for the benefit of the beneficiary

Question 17

What is s25B(2A) provide for accumulated income of a foreign trust distributed to SA resident who was a beneficiary during the year?

Answer 17

Accumulated income shall be included in the income of SA resident if it has not already been subject to tax in SA

Question 18

What does s25B(3) provide for the deduction or allowance relating to the taxable income accrued to beneficiary or the trust?

Answer 18

The amount is deemed to be a deduction which is permitted in the hand of the person who is deemed to have derived the amount to the extent to which the amount of income is deemed to accrued to the beneficiary or to the trust fund

Question 19

What does s25B(4) provide for limitation for deduction or allowances relating to income accrued to beneficiary or the trust?

Answer 19

Any deduction or allowance shall be limited to the income accruing to the beneficiary from that trust in the year of assessment

Question 20

What does section 25B(5) provide for excess expenditure over income?

Answer 20

The excess expenditure over income shall be deducted by the trust in that year but limited to the taxable income of the trust before the deduction of such expenditure (no loss). Where the trust is not subject to tax in SA the excess is carried forward and treated as deduction or allowance which the beneficiary may claim in the next year from the amount he or she gets from the trust.

Question 21

What does s25B(6) provide when the trust cannot absorb the full deduction of the expenditure incurred?

Answer 21

The excess may be granted as deduction or allowance to the beneficiary in the next year of assessment subject to the same limitation as s25B(4)

Question 22

What does it mean when the Act says section 25B is made subject to section 7?

Answer 22

Where section 7 applies, it overrides the provision of s25B

Question 23

What is the purpose of section 7?

Answer 23

Anti-avoidance provision aimed at taxing in the hands of the donor, any income which has resulted from a donation or similar disposition.

Question 23

What does s7(3) provide for income received or accrued to a minor and it was received because of a donation, settlement, interest free loan or similar gratuitous disposition made by that person

Answer 23

This section deems income to be received by a parent.

Question 24

What does s7(5) provide for donations, settlement, interest free loan or similar gratuitous disposition to a trust?

Answer 24

The income arising out of such a gratuitous disposition is deemed to be the income of the person who made the disposition (donor)
Income of a discretionary trust which arises from a donation, settlement or disposition will always be taxed in the donors hand in terms of this section, unless it is distributed to the beneficiaries. Such income will only be taxed in the trust once the donor died.

Question 25

What does s7(6) provide if condition of donation, settlement or other disposition contains any stipulation that the right to receive any income thereby conferred may, under powers retained by the donor?

Answer 25

Such any income as in consequence of the donation, settlement or other disposition is received by or accrue to or in favor of the person on whom that right is conferred, as long as he retains those powers

Question 26

What does s7(7) provide when donor retains the underlying property or retains the right to regain property in the future?

Answer 26

The donor is taxed on the investment income

Question 27

What does s7(8) provide for any amount that is received by a non resident in consequences of a settlement, donation or other disposition made by a resident?

Answer 27

The amount shall be included in the income of the resident (donor)

Question 28

What does s7(9) provide for assets sold for less than market value to the trust?

Answer 28

The shortfall is deemed to be a donation for the purpose of s7.

Question 29

What is the definition of donation?

Answer 29

A disposal of property for no consideration, a wholly gratuitous disposal made out of the liberality or generosity of the donor

Question 30

What is a settlement?

Answer 30

A gratuitous disposal of property subject to specific terms and conditions usually to the trustees of a trust

Question 31

What is the principle of Barnett v COT (disposition)?

Answer 31

A disposition did not only mean a gratuitous disposition but also included a transfer, translation, plan, scheme or arrangement not in the form of a gift or a donation.

Question 32

What is the principles for the following court cases:
Armstrong v CIR
SIR v Rosen

Answer 32

Income passing through a trust retains its identity. The trust merely acts as a conduit pipe through which the income flows. Therefore if a trust receives SA dividend income and distributes to the beneficiary in the year of receipt it retains it nature as dividend and is exempted from tax in the beneficiaries’ hands
Even if its in the form of an annuity (Rosen) unless it is retained in the trust and distributed in the following year then it loses its identity and become capital nature (tax in Trust’s hand or donor)

Question 33

A trust is not a natural person therefore what is the capital gain inclusion rate for a trust?

Answer 33

50%

Question 34

What is the tax rate for a trust?

Answer 34

40%

Question 35

Who is a connected person in relation to a trust?

Answer 35

Paragraph (b) provides that a connected person in relation to a trust is any beneficiary of the trust and any connected person in relation to the beneficiary
Paragraph (bA) provides that persons who are connected persons in relation to the trust are connected persons in relation to each other. Therefore one beneficiary of a trust is a connected person in relation to another beneficiary of a trust.

Question 36

What is the definition of a resident?

Answer 36

Any person(other than natural person) (includes trust) which is incorporated, established or formed in the Republic or which has its place of effective management in the Republic.

Question 37

What does paragraph 80 provide in terms of capital gains distributed to beneficiary?

Answer 37

If a trust distributes an asset to a beneficiary, the gain made by the trust on the disposal of that asset (MV - base cost) is taxable in the beneficiary’s hand and not in the trust’s hands. This is subject to anti-avoidance provisions where the beneficiary is a spouse or minor child. A distribution of an asset by a trust gives rise to a capital gain, because the distribution is a disposal for the purpose of paragraph 11 and the beneficiary is a connected person in relation to the trust, so the asset is deemed to have been disposed if by the trust at market value.

Question 38

What are some of the exceptions to the capital gain rule in terms of a trust?

Answer 38

1. If a gain is vested in a non-resident beneficiary, the trust is taxed
2. If a gain is vested in a tax-exempted PBO or a tax-exempt recreational club or in the government or any provincial administration the trust is taxed
3. A trust cannot distribute a gain which it has acquired from another trust

Question 39

What does paragraph 70 which deals with capital gains retained in the trust provide?

Answer 39

If a SA resident makes a donation, settlement or similar disposition to a trust and the trust makes a capital gain as a result of that donation or disposition the resident is taxed in the capital gain instead of the trust if the gain is not distributed or vested in a beneficiary (SA resident)

Question 40

What are some essential features of a trust?

Answer 40

1. Identification and segregation of the assets by the founder, I.e. the assets which will be placed in trust must be clearly identified and the founder must dispose of them to the trustees
2. The nomination of a trustee to administer the trust for the benefit of the beneficiaries and the acceptance by the trustees of that office
3. Identification of beneficiaries. If this is not done, the trust would be void for vagueness
4. The placing of the asset under the control of the trustees.
5. Directions for the administration of the trust
6. As the trust is a creation of contract, there must be the intention on the part of the founder to create a trust as opposed to agency or nominee, relationship or a partnership.