BE PREPARED AS GOVERNMENT TAKES AIM AT TRUSTS

For many years government has been hostile to trusts. In the latest draft Bill of 2016 taxation amendments, a provision has been inserted on trusts.

New aware that this has not passed into law but it will have a fundamental impact on trusts if enacted as it stands. This early warning gives you more time to consult with your tax advisor.

The proposed changes:

1. An individual or a connected entity that makes an interest-free or low interest rate loan to a trust will be taxed from 1 March 2017 (if the provisions are passed unaltered). The tax will be the difference between the SARS interest rate of 8{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} (note this is subject to change) and the interest amount charged,
2. Uf toy are taxed under this provision, you have 3 years to recover the tax paid from the trust. If the tax is not recovered, the taxed amount is treated as a donation in your hands as a taxpayer.

An example illustrates

Assume you make a R1 million tax-free load to a trust.

In the next tax year you will be liable for tax on R80,000 (8{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} of R1 million). Let’s further assume that tax payable on this is R32,000 (40{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} of R80,000).

Let me tell you how it will be

There’s one for you, nineteen for me

‘Cos I’m the taxman, yeah, I’m the taxman

~ The Beatles – Taxman

If 3 years then elapse you will be liable for tax on R80,000 (8{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} of R1 million). Let’s further assume that tax payable on this is R32,000 (40{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} of R80,000).

Note that the interest cannot be offset against your annual interest exemption of R23,800. Neither can the donations tax be part of your annual R100000 donation tax exemption.

Be prepared!

For many years, one of the tenets of establishing a trust has been for the founder to finance it by and interest-free loan with no adverse tax consequences. If the new tax Bill is enacted as is, this will change.

Be prepared!

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