DTC recommends changes to taxation of trusts

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The Davis Tax Committee’s First Interim Report on Estate Duty (DTC Report) was released for public comment on 13 July 2015.

According to ENSafrica, the DTC Report proposes that “a highly progressive tax that patches loopholes, helps provide equality of opportunity and reduces the concentration of wealth, must be implemented”.

The DTC Report deals with, amongst others, donations tax, estate duty and the taxation of trusts. If the recommendations in the DTC Report are implemented, then all South African resident trusts will be taxed as separate taxpayers. They will be taxed on income at a flat rate of 41% and on capital gains at an effective rate of 27.31%.

The DTC Report was released in draft and is open to comment. Following from this, it is clear that the recommendations in the DTC Report will not necessarily find their way into draft tax legislation. South Africa has well established rules and case law dealing with the taxation of trusts. The South African Revenue Service (“SARS”) recently introduced new tax returns for trusts that require far more detailed disclosures by taxpayers in accordance with these principles.

The recommendations that are applicable to trusts, include the following amendments be made to the existing tax legislation:

  • * The provisions in terms of which trust income can be taxed in the hands of beneficiaries or a donor at lower marginal rates, as opposed to the flat higher rate of tax in a trust, are to be removed. This means that trust income will always be taxed at the higher rate applicable to trusts.
  • * The attribution and distribution rules pertaining to offshore trusts are to be retained. However, all distributions of foreign trusts to South African resident beneficiaries are to be taxed as income.
  • * Trusts should be taxed as separate taxpayers.
  • * No attempt should be made to implement transfer pricing adjustments in the event of financial assistance or interest-free loans being advanced to trusts.
  • * Criminal action could be taken against taxpayers who fail to disclose their direct or indirect interests in foreign trust arrangements.

In respect of offshore trusts, all income derived by such offshore trusts by virtue of a donation from a South African resident would be taxed in the hands of the donor in terms of section 7(8) of the Income Tax Act. When the offshore trust distributes either capital gains or income to a South African resident, such amounts will be taxed as income in the hands of the South African resident beneficiary.

Read more here.