Before we talk about trusts, their benefits, and how they’re taxed, it’s first important to know what a trust is.

A trust is a legal institution whereby a person, known as a trustee, holds or administers property (moveable property like money, or immovable property like physical assets) that is not theirs on behalf of or for the benefit of another person.

Let’s break that down even further.

A trust is a way to manage your estate. IOL uses the following definition:

A trust can be described as a legal relationship that has been created by a person (known as the founder, donor or settlor) through placing assets under the control of another person (known as the trustee) during the founder’s lifetime (an inter-vivos trust) or on the founder’s death (will trust, testamentary trust or trust mortis causa) for the benefit of third persons (the beneficiaries).

Who you select to fulfil these roles should be carefully considered when you set up a trust, to avoid serious repercussions down the line, in terms of taxation and exposing assets to unintended parties.

IOL also breaks down the difference between a trust and a company:

A Trust is different to a company or a close corporation in that it is the trail of each transaction with the trust that will determine whether the trust or a person connected to the trust – such as a funder, donor or beneficiary – is liable for the payment of any tax on income or capital gains earned within the trust.

Trusts are often mishandled in South Africa, which is why the South African Revenue Service (SARS) has started to view them as a form of tax avoidance.

Therefore, a number of measures have been introduced resulting in the income of trusts being taxed at 45% – the highest rate applicable to individuals – and capital gains being taxed at 36% – the highest effective rate applicable to any taxpayer (although the effective tax rate for a capital gain distributed to a shareholder in a company is now at a higher rate of 37.92% after the increase of the dividend tax rate in February 2017).

SARS now recognises the ‘trust’ as a separate taxpayer. Therefore, all trusts have to be registered for income tax.

Failing to register for income tax is a jailable, criminal offence. If you do not end up behind bars, Sars will charge you penalties as high as 200%, if the trust were to pay tax.

If you want to register a Special Trust Type A for a disabled person, Sars may grant “special trust” status to complying trusts, on application.

To benefit from a Special Trust Type B for minors, Sars will use the information on the trust tax return to ascertain whether the trust qualifies as such. No application to Sars is required.

As for where trusts pay tax – if the trust is registered in South Africa, it will pay tax in South Africa.

Overall, it’s a very complicated system. You can read more about the finer details of trust tax here, or you can hand over the planning and execution of setting up a trust and managing its taxes to an expert.

Galbraith | Rushby offers professional tax compliance and advisory services to individuals and businesses.

They’ll handle everything, while you rest easy knowing that your assets are safe and SARS is happy.

[sources:iol&iol]