Even under normal circumstances, tax is a difficult thing to get your head around.  Add a trust to the mix, and the complication factor increases tenfold.

Taxation

The income of a trust may be taxable in the hands of:

  • The trust itself
  • The beneficiaries
  • Split between the trust and the beneficiaries
  • In the case of inter vivos trusts, the living founder

The decision as to who will be taxed will depend on several factors, such as the terms of the trust deed, whether or not the beneficiaries have a vested right to income, and if that income is distributed or not.  Additional factors that need to be considered are whether the beneficiaries are majors or minors, whether the beneficiaries are South African residents, and whether the trust was created within South African borders.

The identification of the person who is taxed on trust income is regulated by the provision of sections 7(2), 7(3), 7(4), 7(5), 7(6), 7(7), 7(8) and 25B of the Income Tax Act (ITA).

 

Calculating tax liability

Tax liability refers to the total amount of taxes owed to SARS by the taxpayer.

Two sections of the General Deductions Formula dictate how we need to calculate the taxable liability of the trust.  Section 11(a) sets out what may be deducted, while Section 23 (g) stipulates what may not be deducted.

Provisional tax

Like companies, trusts are also subject to provisional tax.  Trusts are registered as provisional taxpayers and taxed on an annual basis, with tax payable at the usual provisional tax period intervals (currently, first provisional in August, second provisional in February, with the final payment upon assessment.)

As with any other provisional taxpayer, a penalty will apply for late submission as well as an understatement of the estimated amount.

Rebates and exemptions

Unlike individuals, trusts are not entitled to primary, secondary, or tertiary rebates. They also do not qualify for the general exemption concerning local interest.

Additional points to remember

  • Trusts have a February tax year-end
  • Effective 1 March 2017, the income tax rate has been left unchanged at 45%
  • With effect from 1 March 2016, the inclusion rate of 80% (previously 66.6%) is applied to a net capital gain of a trust. This taxable capital gain in the trust is subject to tax at 45%, resulting in an effective tax rate of 36% for all capital gains.

 

As a trustee you are the nominated representative tax payer of the trust and as such the buck stops with you. For more assistance with your trust affairs please feel free to reach out to me.

Published On: October 27th, 2020 / Categories: Tax, Trusts / Tags: , /

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