In South Africa, trusts are subject to specific tax rules that differ from other entities. Here’s how a trust is taxed:
1. income tax (trusts)
• Trusts are taxed at a flat rate of 45% on income retained within the trust.
• However, if income is distributed to beneficiaries during the tax year, it is taxed in the hands of the beneficiaries at their individual marginal tax rates. This is done through the conduit principle, which allows the income to “flow through” the trust to the beneficiaries.
2. capital gains tax (cgt)
• A trust is subject to Capital Gains Tax on the disposal of assets. The inclusion rate for capital gains in a trust is 80%, meaning that 80% of any capital gain is included in the trust’s taxable income.
• The effective CGT rate for trusts is:
• 36% for trusts (45% tax rate × 80% inclusion rate).
• If the capital gain is distributed to beneficiaries, the gain is taxed in the beneficiaries’ hands, and their individual inclusion rates apply.
3. dividends tax
• If a trust holds shares and earns dividends, these dividends are subject to dividends withholding tax at a rate of 20%, unless an exemption applies (e.g., for a Public Benefit Organisation).
4. estate duty
• Trust assets are typically not included in the estate of the settlor (person who created the trust) for estate duty purposes, provided the trust is properly structured and the settlor no longer controls the trust. However, anti-avoidance provisions could apply in certain cases where the settlor retains control or benefits from the trust.
5. section 7c anti-avoidance rules
• Section 7C of the Income Tax Act was introduced to prevent estate duty avoidance through interest-free loans or low-interest loans to trusts. Under this rule, if an individual makes an interest-free or low-interest loan to a trust, the interest that would have been payable (had the loan been at market-related interest rates) is deemed to be a donation. This donation is then subject to donations tax at a rate of 20% on the value exceeding the annual exemption of R100,000.
Trusts remain a popular vehicle for estate planning in South Africa due to their flexibility and the protection they offer, but the tax treatment must be carefully considered in the context of estate duty and income tax planning.
