Let’s get clarity on the tax consequences for an ownership trust
Depending on the circumstances, the income of a trust is either taxed in the hands of the Beneficiary, the Donor or the Trust.
Definition of an ownership trust
An ownership trust is created when the founder transfers ownership of assets or property to a trustee(s) to be held for the benefit of the defined or determinable beneficiaries of the trust. The trust assets in an ownership trust vest in the hands of its trustees and not the beneficiaries themselves. The trust deed then determines what the rights are of the beneficiaries with regard to the trust assets.
WHEN WILL A TRUST OR ITS BENEFICIARIES BE LIABLE TO PAY TAX?
A trust does not have legal personality except in certain circumstances such as for tax purposes. A trust can be liable to pay tax in the following circumstances:
• Income Tax
Section 25B of the Income Tax Act of 1962 and paragraph 80 of the Schedule 8 recognise the application of the conduit principle. The principle provides that income received by or accrued on behalf of a beneficiary who has a vested right to such an amount during each year shall be deemed to be an amount. This amount has accrued to the beneficiary and shall be taxed in the hands of the beneficiary.
• Dividend Tax
According to section 64E (1) of the Income Tax Act of 1962, dividend tax is imposed at a rate of 20% on the receipt of dividends. Dividend tax is a withholding tax and should be withheld from dividend distributions and paid to SARS by the company. However, the ultimate responsibility for paying dividend tax would be that of the beneficial owner. The definition of the beneficial owner is the person who is entitled to the benefit of the dividend attaching to a share.
• Donation Tax
According to sections 54 to 64 of the Income Tax Act of 1962, donation tax is payable at a flat rate of 20% on the value of property disposed of by way of donation. The first R100 000 of the value of property or assets donated each year shall be exempt from donation tax.
• Capital Gains Tax
When an asset is disposed of, Capital Gains Tax (CGT) may apply. When a trust disposes of the assets held in the trust, the full capital gain or loss values are not taxable, only part thereof. The capital gain is multiplied by the inclusion rate and the result is added to the taxable income of the trust. The current inclusion rate of a trust is 80%. In certain circumstances, such as employee share incentive programmes housed in a trust, the beneficiaries may be liable for CGT in terms of the conduit principle.
Important to know is that amongst others, failure to register the trust for tax, prepare financials and submit returns will have far-reaching consequences. This can lead to unnecessary penalties, additional interest and other sanctions in terms of the Income Tax Act of 1962. Even though a trust does not constitute a legal entity, it is considered a “person” for the purposes of the Income Tax Act of 1962 and can be subject to tax.
SERR Synergy specialises in unique ownership solutions, including the structuring of ownership trusts, collective ownership structures and family trusts. Businesses should take cognisance of the fact that B-BBEE ownership trusts are partially NON-discretionary and have their own unique recognition.
By Rozanne van Heerden
About the Author:
Rozanne van Heerden obtained her LLB from the University of South Africa. The High Court of South Africa admitted her as an attorney in 2016. Rozanne joined SERR Synergy in November 2017 and forms part of the Trust and Ownership department.
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