Family Trust Investments and Tax – Part 3

4. Implementation

Care should therefore be taken in deciding which assets, if any, to peg in a family trust during one’s lifetime and the tax consequences should be fully investigated. Where a family trust is considering investment vehicles, care should also be taken to ensure that, in addition to factors such as cost, liquidity, and term, the client’s tax situation is taken into account and that the appropriate trustee resolutions are obtained. In addition, it is important to consider when debit loan accounts may be used to minimize the tax burden and where credit loan accounts exist, attention should be given during a planners’ lifetime to minimising the impact of these loan accounts on his estate.

Bibliography

  • Income Tax Act, No. 58 of 1962.
  • Trust Property Control Act, No. 57 of 1988.
  • Long-Term Insurance Act, No. 52 of 1998.
  • How trusts pay all taxes, 1st Ed, BSP Seminars, pages 66 – 68.
  • SARS Comprehensive Guide to CGT.
  • ABC Trust v CIR 11410 (TPD), Armstrong v Commissioner for Inland Revenue 1938 AD 343, 10 SATC 1 and Secretary for Inland Revenue v Rosen 1971 (1) SA 172 (A), 32 SATC 249, XXX Trust v Commissioner for the South African Revenue Service (NCD – as yet unreported).
Footnote 1:  Section 56(2)(b). Currently the first R100 000 of the annual value of property donated by a natural person is exempt from donations tax. Footnote 2:  Section 7(5) and paragraph 70 of the Eighth Schedule to the Income Tax Act. See also How trusts pay all taxes, 1st Ed, BSP Seminars, pages 66 – 68.
Footnote 3:  See for example Premiums and Problems, 99th Ed, page E7. Footnote 4:  Paragraph 55(1)(a) of the Eighth Schedule to the Income Tax Act. Where the contracting party is not the original beneficial owner, the policy proceeds are subject to CGT.
Footnote 5:  Calculated as follows: R1 million less R500 000 base cost = R500 000. Less: Annual Exclusion (2009/2010) of R17 500 = R482 500. Multiply by inclusion rate (individuals) of 25% = R120 625 Taxable Capital Gain. Multiply by marginal rate of 40% = R48 250. Footnote 6:  Calculated as follows: (HP10BII Financial Calculator): Shift Clear All, 1 000 000 PV, 10 N, 10 I/YR, FV = R2 593 742.
Footnote 7:  R2 593 742 – R1 000 000 = R1 593 742 which is total increase in value after 10 years. Footnote 8:  Calculated as follows: (HP10BII Financial Calculator): Shift Clear All, 382 338 FV, 10 N, 8 I/YR, PV = R177 096.
Footnote 9:  Calculated as follows: (HP10BII Financial Calculator): Shift Clear All, 2 593 742 FV, 10 N, 8 I/YR, PV = R1 201 404. Footnote 10:  See section 103 and paragraph 80 of the Income Tax Act, No. 58 of 1962 (as amended). See also SARS Comprehensive Guide to CGT and example discussed on pages 81 and 82.
Footnote 11:  Paragraph 12(5)(a) of the Eighth Schedule to the Income Tax Act. See also ABC Trust v CIR 11410 (TPD). Footnote 12:  Section 3(3)(a) of the Estate Duty Act, 45 of 1955.
Footnote 13:  Section 4(q) of the Estate Duty Act. However,
note the estate duty consequences of possibly increasing the dutiable estate of the spouse.
Footnote 14:  See Premiums and Problems, 99th Ed, page D28.
Footnote 15:  See section 103 and paragraph 80 of the Income Tax Act, No. 58 of 1962 (as amended). Footnote 16:  SARS Comprehensive Guide to CGT, page 83.
Footnote 17:  See also XXX Trust v C: SARS (NCD – 2008). Here the entire residue of an estate was bequeathed to a trust. The court held that whilst the wording of the will reflected that
the intention of the testatrix was that her claim against the trust (loan account) was to form part of the residue in the estate (which was bequeathed to the trust), it was not her intention to specifically bequeath the claim to the trust, and therefore paragraph 12(5) had no application, as it was not her intention to dispose of the claim in favour of the trust for no consideration. Note that SARS conceded that had the executor recovered the claim first, the debt would have become settled and no question of a discharge for no consideration would have arisen. The court, however, held that the executor had a
discretion to merely award the claim under the loan account to the trust instead of following the more expensive route of
recovering same only to repay it again, and held that the intention of the testator is the determining factor, not the manner in whichthe executor administered the estate.
Footnote 18:  Paragraph 70 of the Eighth Schedule to the Income Tax Act.
Footnote 19:  Income Tax Act. Footnote 20:  Subject to the attribution rules contained in section 7 of the Income Tax Act.
Footnote 21:  Paragraphs 68, 69, 71 and 72 of the Eighth Schedule to the Income Tax Act. Footnote 22:  See section 103 and paragraph 80 of the Income Tax Act, No. 58 of 1962 (as amended).
Footnote 23:  See the Financial Advisory and Intermediary
Services Act (FAIS), 2002, and the FAIS General Code of Conduct, in particular paragraph 8.
Footnote 24:  Section 25B of the Income Tax Act. Where a beneficiary has acquired a vested right to trust income as a result of the trustee(s)
exercise of discretion, the income is deemed to accrue to such beneficiary, subject to section 7.
Footnote 25:  See, for example, Armstrong v Commissioner
for Inland Revenue 1938 AD 343, 10 SATC 1, and Secretary for Inland Revenue v Rosen 1971 (1) SA 172 (A), 32 SATC 249.
Footnote 26:  Section 10(1)(i) (xv) and (xvi) of the Income Tax Act. Exemption of R21 000 for taxpayers under 65, and R30 000 for taxpayers over 65.
Footnote 27:  The first phase of STC reform has been implemented (Taxation Laws Amendment Bill), with STC reduced from 12,5% to 10%. The second phase, a final dividend withholding tax on shareholders, which was expected in 2009, now awaits the finalisation of a treaty ratification process and is expected to be implemented in the second
half of 2010. Currently section 10(1)(k) exempts local dividends received by a resident from tax.
Footnote 28:  Regard should, however, be had to the attribution rules contained in section 7 and section 25 of the Income Tax Act.
Footnote 29:  As discussed in 2 above. Footnote 30:  Using a large gain of, for example, R600 000, resulting from the switching/rebalancing of a unit trust portfolio held by a trust, in this event: Where the gain is retained by the Trust: 50% would be included in the Trust’s taxable income (R300 000) which would be
taxed at 40%: Thus CGT of R120 000. Where the gain is distributed to four beneficiaries: 25% of the gain after deducting the annual
exclusion of R17 500 (2009/2010) would be included in each of their taxable incomes (R33 125), and assuming each had a marginal tax rate of 25%, CGT of R8 281,30 would be payable by each beneficiary
(R33 125 in total).
Footnote 31:  See section 103 and paragraph 80, Income Tax Act, No. 58 of 1962 (as amended). Footnote 32:  Four Funds Approach. Section 29 of the Income Tax Act.
Footnote 33:  Section 54, Long Term Insurance Act and the regulations thereto. Only one loan and one disinvestment may be taken during the first five years and in any subsequent ‘restriction period’. However, the vehicle is ‘open-ended’
with no fixed term. The amount of the loan or disinvestment is limited to the investment(s) made plus 5% compound interest per annum.  Any additional investments that exceed the higher of the investments made in the previous two years by more than 20% will lead to an additional restriction period.
Footnote 34:  A resolution is required from the trustees in order to determine the risk profile of the trust.

The article was initially published an Old Mutual Newsletter and we make reference to Stanley Tordiffe BCompt(Hons)CA(SA), CFP (021 555 9300).

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