Trusts TAXATION 3B
Introduction
“A trust is a fiduciary relationship in which one party, known as a trustor, gives another
party, the trustee, the right to hold title to property or assets for the benefit of a third party,
the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to
make sure those assets are distributed according to the wishes of the trustor, and to save
time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes. In
finance, a trust can also be a type of closed-end fund built as a public limited company.
Where simplicity, flexibility and retention of control are of paramount importance, there is
simply no form of entity that can measure up to the trust. A person may, for instance,
transfer ownership of an asset to a discretionary trust where the trustees can manage that
asset for the benefit of the beneficiaries of that trust while the asset is also protected
against creditor claims that may in future be instituted against that person or beneficiaries.
Although there are numerous credible motivations for the use of trusts, the use of
discretionary trusts for South African income tax and estate duty savings has come under
intense scrutiny in recent years, which resulted in the introduction of certain anti-avoidance
provisions to discourage these practices. This unit is a discussion of trusts and how they are
taxed (Bruwer et al 2019).”
2.2 The nature of a trust
The basic principle of a trust is that someone (the trustee) controls and administers
property, not for himself, but on behalf of and for the benefit of other persons. There are
always at least three parties to a trust, that is to say the founder, the trustee and the
beneficiary. The founder establishes the trust and hands over any property (that may also
include money) to the trustee. The trustee receives the property and is obliged to
administer these trust goods to the benefit of the beneficiary. The beneficiary is the person
for whose benefit the trust goods are administered and applied (Bruwer et al 2019)”.
“A trust may be established in one of two ways:
Testamentary trust (trust mortis causa):
With such a trust, the testator bequeaths cash or other assets in his or her will to a trustee,
to administer for the benefit of the testator’s beneficiaries. Such a trust comes into
existence on the death of the testator. This is particularly popular when the beneficiaries are
minor children. The parent who dies leaves possessions to a trust, and a trustee is appointed
to apply and administer these goods on behalf of and for the benefit of the children. When
the children reach a certain age, the trust may be dissolved and the remaining trust goods
may be distributed to the children, or the trust may continue to exist indefinitely, depending
on the testator’s stipulations in the will.
, Inter vivos trust:
An ‘inter vivos trust’ is a trust that is established while the founder is still alive. The assets
may be donated or sold to the trust and do not necessarily just have to be donated or sold
by the founder. For example, a father (founder and donor) may establish a trust for the
benefit of his children and donate R100 to the trust. The children’s grandfather may then
donate or sell further assets to the trust. The assets vest in the trustee, who must
administer the trust in accordance with the stipulations of the trust deed. Inter vivos trusts
are particularly popular in estate planning and are used to peg the value of assets in the
estate.
Further to the above two types of trusts, trusts can be classified as either discretionary
trusts or bewind (vested) trusts. With a discretionary trust, no beneficiary has a vested
(unconditional) right to the income or capital of the trust and the trustees have full
discretion with regard to how much is distributed to which beneficiary. With a bewind trust,
the beneficiaries have vested (unconditional) rights to the capital and income from the
trust. In practice, a trust is not solely one of the above and could also be a combination of
these, with some beneficiaries having vested rights and other beneficiaries having
discretionary rights.
2.3 Rate at which a trust is taxed
Ordinary trusts
For tax purposes, a trust is deemed to be a person. The definition of a ‘person’ in section 1
of the Act expressly includes a trust. Trusts (excluding special trusts) are taxed at a flat rate
of 45%.
Special trusts
A special trust is taxed at the same rate as a natural person. The same sliding tax scales
apply however, a special trust is not entitled to the primary, secondary or tertiary rebates in
section 6 nor to the basic interest exemption on local interest in terms of section 10(1)(i), as
it is not a natural person.
A special trust is a trust created:
or more persons who have a disability which incapacitates that
person or persons from earning sufficient income for their maintenance or from managing
their own financial affairs (known as a paragraph (a) special trust). When the person(s) for
whose benefit the trust has been founded dies, the trust is no longer deemed to be a special
trust for the purposes of years of assessment ending on or after the date of death. If the
trust was created for the benefit of more than one person, the beneficiaries must be
Introduction
“A trust is a fiduciary relationship in which one party, known as a trustor, gives another
party, the trustee, the right to hold title to property or assets for the benefit of a third party,
the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to
make sure those assets are distributed according to the wishes of the trustor, and to save
time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes. In
finance, a trust can also be a type of closed-end fund built as a public limited company.
Where simplicity, flexibility and retention of control are of paramount importance, there is
simply no form of entity that can measure up to the trust. A person may, for instance,
transfer ownership of an asset to a discretionary trust where the trustees can manage that
asset for the benefit of the beneficiaries of that trust while the asset is also protected
against creditor claims that may in future be instituted against that person or beneficiaries.
Although there are numerous credible motivations for the use of trusts, the use of
discretionary trusts for South African income tax and estate duty savings has come under
intense scrutiny in recent years, which resulted in the introduction of certain anti-avoidance
provisions to discourage these practices. This unit is a discussion of trusts and how they are
taxed (Bruwer et al 2019).”
2.2 The nature of a trust
The basic principle of a trust is that someone (the trustee) controls and administers
property, not for himself, but on behalf of and for the benefit of other persons. There are
always at least three parties to a trust, that is to say the founder, the trustee and the
beneficiary. The founder establishes the trust and hands over any property (that may also
include money) to the trustee. The trustee receives the property and is obliged to
administer these trust goods to the benefit of the beneficiary. The beneficiary is the person
for whose benefit the trust goods are administered and applied (Bruwer et al 2019)”.
“A trust may be established in one of two ways:
Testamentary trust (trust mortis causa):
With such a trust, the testator bequeaths cash or other assets in his or her will to a trustee,
to administer for the benefit of the testator’s beneficiaries. Such a trust comes into
existence on the death of the testator. This is particularly popular when the beneficiaries are
minor children. The parent who dies leaves possessions to a trust, and a trustee is appointed
to apply and administer these goods on behalf of and for the benefit of the children. When
the children reach a certain age, the trust may be dissolved and the remaining trust goods
may be distributed to the children, or the trust may continue to exist indefinitely, depending
on the testator’s stipulations in the will.
, Inter vivos trust:
An ‘inter vivos trust’ is a trust that is established while the founder is still alive. The assets
may be donated or sold to the trust and do not necessarily just have to be donated or sold
by the founder. For example, a father (founder and donor) may establish a trust for the
benefit of his children and donate R100 to the trust. The children’s grandfather may then
donate or sell further assets to the trust. The assets vest in the trustee, who must
administer the trust in accordance with the stipulations of the trust deed. Inter vivos trusts
are particularly popular in estate planning and are used to peg the value of assets in the
estate.
Further to the above two types of trusts, trusts can be classified as either discretionary
trusts or bewind (vested) trusts. With a discretionary trust, no beneficiary has a vested
(unconditional) right to the income or capital of the trust and the trustees have full
discretion with regard to how much is distributed to which beneficiary. With a bewind trust,
the beneficiaries have vested (unconditional) rights to the capital and income from the
trust. In practice, a trust is not solely one of the above and could also be a combination of
these, with some beneficiaries having vested rights and other beneficiaries having
discretionary rights.
2.3 Rate at which a trust is taxed
Ordinary trusts
For tax purposes, a trust is deemed to be a person. The definition of a ‘person’ in section 1
of the Act expressly includes a trust. Trusts (excluding special trusts) are taxed at a flat rate
of 45%.
Special trusts
A special trust is taxed at the same rate as a natural person. The same sliding tax scales
apply however, a special trust is not entitled to the primary, secondary or tertiary rebates in
section 6 nor to the basic interest exemption on local interest in terms of section 10(1)(i), as
it is not a natural person.
A special trust is a trust created:
or more persons who have a disability which incapacitates that
person or persons from earning sufficient income for their maintenance or from managing
their own financial affairs (known as a paragraph (a) special trust). When the person(s) for
whose benefit the trust has been founded dies, the trust is no longer deemed to be a special
trust for the purposes of years of assessment ending on or after the date of death. If the
trust was created for the benefit of more than one person, the beneficiaries must be
