TRUSTS UNDER TAX ATTACK
TAX
A tax efficient avenue in estate planning curtailed. By Grant Berndt- Abdo & Abdo.
he creation and establishment of trusts, particularly family trusts has been used by
T many as a useful estate planning tool. Usually the husband and wife set up the trust, with them and one other person being the trustees, and the husband, wife and their children being the beneficiaries.
The trust then in time buys an asset / s, with the funding for the purchase coming from the husband and wife in their personal capacities lending money from their savings or investments to the trust. The money loaned is then reflected in the trusts ' financials as an interest free loan by the trustee / s and is reduced by R100,000 per year, being the maximum tax free amount a tax payer can donate per year. Any donation in excess of R100,000 per year is subject to donations tax at the rate of 20 %.
The growth in the asset purchased then accrues in the hands of the trust and not the lender of the money. Should the lender of the money die before the loan has been settled in full, his Will usually bequeaths the loan to the trust and the increase in the value of the asset purchased or the value of the asset itself does not attract estate duty in the lender ' s estate.
In 2013, the Minister of Finance established a tax review committee, known as the Davis Tax Committee to assess the tax policy framework. The Davis Tax Committee has made recommendations, and thus speculation, that trusts are next in the firing line for major changes in the law surrounding their taxation. This has now started with the passing in January of the Taxation Laws Amendment Act in respect of the interest free loans granted by trustees to their trusts.
As from 1 March 2017, any loan to a trust by someone connected to that trust that does not charge interest at the current minimum rate of 8 % per year is deemed to be a donation on the last day of each tax year that the loan remains outstanding. The amount of any deemed donation will be the difference between the amount of interest actually paid to the lender and the amount payable on the loan at the official interest rate, currently 8 % per year.
So the lender will now either have to pay income tax on the interest he / she should have been paid by the trust, had the trust borrowed the money from, say a financial institution, or if no interest rate, or a lower interest rate is charged on the loan, the difference between currently 8 % per year and the interest actually charged, is deemed to be a donation.
So, if for example, a trustee lends his trust R500,000 interest free to buy an asset, he would have reduced the loan by donating R100,000 to the trust every year. However, as from the next financial year, starting on 1 March 2017, R40,000( being R500,000 x 8 % deemed interest) will be deemed to have been donated leaving only R60,000 now to be used in reducing the loan. However, should the interest free loan be more than R1,250,000, the deemed donation will be in excess of R100,000 and thus donations tax will have to be paid.
Another tax efficient avenue in estate planning has now been substantially curtailed.
12 sensible finance Mar17