EXAMINATIONS 2013 CARMEN VENTER WORKSHOP FOR CFP CARMEN VENTER WORKSHOPS FOR CFP EXAMINATIONS 2013

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1 2013 CARMEN VENTER WORKSHOP FOR CFP EXAMINATIONS Page 1

2 TAXATION OF TRUSTS DISCLAIMER: The information in these notes is for general information purposes only and is not a substitute for professional advice. The presenter will not accept responsibility for any actions taken or not taken on the basis of the information in these notes. These notes include summaries and case studies of some of the many issues involving Trusts and is therefore by no means exhaustive. COPYRIGHT: This material is copyright by Carmen Venter and therefore, no part of this material may be reproduced or distributed in any form or means without the Author s written permission. Reproduction of any of the work that is not authorized, will constitute a copyright infringement and the offender can be liable under the civil and or criminal law. Where material has been sourced reference has been made and there are not protected under the copyright notice. carmenventer@discoverymail.co.za Page 2

3 TESTAMENTARY TRUST INTER VIVOS TRUST [ TRUST MORTIS CAUSA] Comes into being on date of death Comes into being during the lifetime of the founder DISCRETIONARY VESTING TRUST TRUST {BEWIND } SPECIAL TRUST AGE OF 18 & BELOW MENTALLY HANDICAPPED carmenventer@discoverymail.co.za Page 3

4 TERMINOLOGY USED AND MEANING VESTING : Beneficiaries have vested rights in the trust assets. Trustees are merely administrators of the assets DISCRETIONARY: Beneficiaries have no vested rights in the trust assets. Ownership (control) of the assets vest in the Trustees in their fiduciary capacity as a Trustee, who administer the trust assets for the benefit of the beneficiaries. SPECIAL TRUST: INCOME TAX - (a) minor beneficiaries under the age of 18 stops being a special trust in the year of assessment that last child becomes 18 or death (b) mentally handicapped / serious physical disability of mentally handicapped CAPITAL GAIN (a) mentally handicapped/ serious physical disability stops being a special trust at earliest of :-all assets are disposed of or 2 years from date of death. VESTS: Beneficiary has a guaranteed/ unconditional right to income/ capital of the trust. If it is an immediate right then he exchanges it from a vested right/a personal right to a real right. If it is a right sometime in the future he retains a vested right / a personal right. Vested right includes: income due and payable; income credited to an account in favour of the beneficiary, income capitalized; income dealt with in favour of the beneficiary [ pay support, maintenance, education etc] CONTINGENT RIGHT The right of the beneficiary to income/ capital of the Trust, is not immediate but rather contingent or conditional upon the occurrence of an uncertain event. This right to income/capital will then only vest in the beneficiary when and if the condition has been filled or the contingency has taken place. Before the vesting of income/capital, the beneficiary only has a hope (a spes) and therefore cannot constitute an asset in the beneficiary s hands. carmenventer@discoverymail.co.za Page 4

5 TAXATION OF TRUSTS [2014 RATES] ORDINARY TRUST SPECIAL TRUST FOR MENTALLY HANDICAPPED / DISABILITY FOR MINORS INCOME TAX: 40% INCOME TAX: NATURAL PERSON NATURAL PERSON NO REBATES 18% - 40% 18% - 40% NO REBATES NO REBATES CGT : 66.6% INCLUSION RATE CGT : 33.3% INCLUSIVE 33.3% INCLUSIVE 26.7% EFFECTIVE RATE 13.3% EFFECTIVE 13.3% EFFECTIVE NO ANNUAL EXCLUSION ANNUAL EXCLUSION NO ANNUAL EXCLUSION NO NATURAL PERSON EXCLUSION NATURAL PERSON NO NATURAL PERSON EXCLUSIONS EXCLUSIONS carmenventer@discoverymail.co.za Page 5

6 TAXATION OF TRUSTS EXEMPTIONS ALLOWED S 10(1)(k)(i) = local dividend [15% WITHHELD] S10 B = foreign dividend using the formula = [foreign dividend received x 25/40] EXEMPTIONS NOT ALLOWED S10 (1)(i) local interest exemption only for natural persons PRIMARY/ SECONDARY / TERTIARY REBATES Not allowed for a Trust whether ordinary or a special trust as these are for natural persons only Medical credit rebates whether ordinary or a special trust as these are for natural persons only DEDUCTIONS ALLOWED Expenses incurred in the production of income is allowed normal tax rules apply. carmenventer@discoverymail.co.za Page 6

7 Using the above facts, calculate the taxation in each type of trust: An ordinary Trust, receives income totaling R and capital gain from the sale of a primary residence of R The income is made of R rental, R local interest, R local dividend and R foreign dividend. Taxable income and tax payable in the trust? EXAMPLE 1 ORDINARY TRUST EXAMPLE 2 SPECIAL TRUST FOR MINOR EXAMPLE 3 SPECIAL TRUST MENTALLY HANDICAPPED carmenventer@discoverymail.co.za Page 7

8 HOW DO YOU TRANSFER ASSETS INTO A TRUST? 1. DONATE DONATIONS TAX > ANNUALY AT 20% CAPITAL GAINS TAX AS A RESULT OF A DISPOSAL TO THE TRUST [ PORTION OF DONATIONS TAX FORMS PART OF BASE COST FOR CAPITAL GAINS PURPOSES] TRANSFER DUTY WHERE APPLICABLE 2. BEQUEST ESTATE DUTY ON 20% > R CAPITAL GAINS TAX AS A RESULT OF THE DISPOSAL TO THE TRUST 3. SELL CAPITAL GAINS TAX AS A RESULT OF A DISPOSAL TO THE TRUST TRANSFER DUTY WHERE APPLICABLE EXAMPLE OF COST IN DONATING OR SELLING ASSETS TO A TRUST Facts: Assets being moved Holiday Home in Umhlanga MV , BC ; holiday house in Kysna MV , BC ; Business Interest MV with a BC of UNDER A DONATION DONATING: HOLIDAY HOME IN UMHLANGA CLUSTER HOUSE IN KNYSNA BUSINES INTEREST UNIT TRUSTS SHARES IN SASOL LESS EXEMPTION AT 20% DONATION carmenventer@discoverymail.co.za Page 8

9 CAPITAL GAINS TAX UMHLANGA PROCEEDS BC KNYSNA PROCEEDS BC UNIT TRUSTS PROCEEDS BC SHARES SASOL PROCEEDS BC BUSINESS INTEREST PROCEEDS BC TOTAL AGGREGATE GAIN DONATIONS TAX PART OF BASE COST OF CGT GAIN / MV X DONATION / X = GAIN LESS EXCLUSION carmenventer@discoverymail.co.za Page 9

10 33.3% INCLUSION RATE AT 40% MARGINAL RATE DONATION CAPITAL GAIN SET UP 5000 FEES PER PROPERTY TRANSFER DUTY PLUS TOTAL COST ON DONATION ON SALE CAPITAL GAIN LESS EXCLUSION AT 33.3% AT 40 % CAPITAL GAIN SET UP 5000 FEES PER PROPERTY TRANSFER DUTY PLUS TOTAL COST ON SALE NEITHER OF THE ABOVE CALCULATIONS TAKE SECURITIES TAX OF 0.25% INTO ACCOUNT BUT IN REALITY THIS WOULD ALSO BE A COST. (UFS Advanced assignment question. Solution is that of Carmen Venter's) carmenventer@discoverymail.co.za Page 10

11 NATURE OF INCOME RECEIVED INTO AND DISTRIBUTED BY THE TRUST DIVIDENDS INTEREST RENTAL TRADE INCOME ASSETS SOLD OR DONATED OR BEQUEATHED TRUST OWN ASSETS THAT ARE GENERATING THE INCOME ABOVE AND DISTRIBUTES TO THE BENEFICIARIES AS PER THE TRUST DEED OR BY TRUSTEES EXERCISING THEIR DISCRETION CONDUIT PRINCIPLE FOR INCOME. NB NOT GAIN! BENEFICIARY BENEFICIARY BENEFICIARY BENEFICIARY Page 11

12 WHO IS ACTUALLY LIABLE FOR THE INCOME AND OR GAIN EARNED BY THE TRUST? INCOME Section 25B (1) any amount received by or accrued to a trust, will be deemed to accrue to a beneficiary, if that beneficiary has a vested right to it. Section 25B (2) where beneficiary acquired a vested right as a result of a trustee discretion, deemed to accrue to a beneficiary ELSE :- THE TRUST SUBJECT TO SECTION 7 CAPITAL GAIN Para 80(1) where an ASSET is vested in a beneficiary by a trust forms part of the aggregate gain / loss of the beneficiary to whom the asset was disposed of. Para 80 (2) where a GAIN is vested (by the fact that he has an interest in the asset or discretion of the Trustees] the whole or portion of the gain forms part of the aggregate gain /loss of the beneficiary to whom the gain so vests. ELSE:- THE TRUST SUBJECT TO PARA 68 / 69 / 71 /72 carmenventer@discoverymail.co.za Page 12

13 EXAMPLE 1 - Silke In terms of will, the assets of a testator s estate are vested in a resident trust to be administered for & on behalf of the deceased s 6 minor children. The Trustees were obliged to disburse as much of the income of the trust as should in their discretion be found necessary for the maintenance & education of the children. The residue of the income is to be accumulated for the benefit of the children and to be paid over to them if and when they reach the age of 25. In terms of the deed, a child is not entitled to his share of the accumulated income in event of death prior to the age of 25. In the 2014 year of assessment, the trust received net income of R from the estates assets and,in terms of their discretion, they spent R in total for the maintenance and education of the children equally. The R income derived was all interest from investments. SOLUTION EXAMPLE 2 - Silke In terms of her father s will, Yvonne (age 17) was fully entitled to the residue of his estate, to be held in a resident trust and administered by Trustees on behalf of Yvonne. It is clear from the Trust Deed that Yvonne has full vested rights to income and capital of the trust although, the Trustees had the full discretion to determine how much of the income/ capital should be made available to Yvonne. Upon reaching the age of 30, the trust is to terminate and Yvonne is to then receive all the assets of the trust. In the 2014 year of assessment R6000 rental income was awarded to Yvonne by the Trustees and R rental income was re-invested. An asset with a market value of R1 million was also distributed to Yvonne. This asset had a market value of R when the trust originally acquired it. SOLUTION carmenventer@discoverymail.co.za Page 13

14 A WORD ABOUT ANNUITIES VERY NB!! Page 14

15 CAPITAL GAINS DISTRIBUTION AND TAXATION TRANSACTION DISCRETIONARY VESTING ASSET (WITH GAIN) DISTRIBUTED 80 (1) BENEFICIARY IS TAXED GAIN = MV ON DATE OF DISTRIBUTION BC FOR THE TRUST ATTRIBUTION = DONOR NON RESIDENT = TRUST ASSET (WITH LOSS) DISTRIBUTED 80(1) NOT APPLICABLE LOSS REMAINS IN TRUST = CLOGGED ASSET SOLD AND GAIN DISTRIBUTED 80(2) BENEFICIARY IS TAXED GAIN = PROCEEDS BC FOR TRUST ATTRIBUTION = DONOR NON RESIDENT = TRUST ASSET SOLD AND GAIN STAYS IN TRUST 80(2) NOT APPLICABLE NO VESTED RIGHT TO BENEFICIARY TRUST TAXED: GAIN = PROCEEDS BC FOR THE TRUST EXCHANGE OF PERSONAL USE FOR REAL RIGHT. THIS EXCHANGE IS BACKDATED TO ORIGINAL VESTING. BC = MV AT DISTRIBUTION GAIN = 0 AS WITH ABOVE LOSS = 0 BENEFICIARY TAXED GAIN = PROCEEDS BC FOR TRUST X % OF INTEREST. ATTRIBUTION = DONOR BENEFICIARY TAXED GAIN = PROCEEDS BC FOR TRUST X % OF INTEREST. ATTRIBUTION DONOR TRUST SELLS ASSETS = LOSS 80(2) NOT APPLICABLE LOSS REMAIN IN TRUST LOSS = PROCEEDS BC FOR TRUST BENEFICIARY SELLS HIS INTEREST IN TRUST 80(1) APPLICABLE BC = NIL BENEFICIARY TAXED ON FULL PROCEEDS ATTRIBUTION = DONOR LOSS REMAINS IN TRUST BENEFICIARY TAXED GAIN = PROCEEDS BE FOR THE BENEFICIARY carmenventer@discoverymail.co.za Page 15

16 ATTRIBUTION RULES ONLY APPLICABLE IF THERE WAS A DISPOSITION OF A GRATUITOUS NATURE!! AND THE DONOR IS ALIVE!!! INCOME CAPITAL S7(2) Income vest with spouse taxed in the hands of the donor Para 68 Gain vests in a spouse gain taxed in the hands of the donor spouse spouse S7(3) and (4) Income vest with minor taxed in the hands of the parent of the child Para 69 Gain vested in a minor gain taxed in the hands of the donor parent S7(5) income not vested in a beneficiary due to some condition taxed in the hands of the donor Para 70 Gain not vested in beneficiary because it is subject to a condition gain taxed in the hands of the donor S7(6) income can be revoked by donor taxed in hands of the donor whether actually vested/disposed or not Para 71 Gain vested in beneficiary but can be revoked by donor gain taxed in the hands of the donor S7(7) income that has been ceded to another (trust ) which was due to the donor taxed in the hands of the donor No corresponding gain attribution as asset still owned by donor S7(8) income received by a non-resident as a result of a gratuitous disposition by a resident donor taxed in the hands of the donor Para 72 asset or gain vested in a non-resident beneficiary gain taxed in the hands of the donor Para 73 where income and capital are attributed to a donor - income attributed first then the gain limited to the saving enjoyed by the trust S7(9) asset sold below market value the difference is a DONATION for donation tax purposes carmenventer@discoverymail.co.za Page 16

17 Summary of above IF THERE IS NO DONATION OR DISPOSITION OF A GRATUITOUS NATURE If the income / capital VESTS with a beneficiary = Beneficiary taxed If the income / capital DOES NOT VEST with a beneficiary = Trust is taxed IF THERE IS A DONATION OR DISPOSITION OF A GRATUITOUS NATURE THEN: WE ARE GOING TO FIRST TRY: TAX THE DONOR IF NOT, THEN TAX THE BENEFICIARY IF NOT, THEN TAX THE TRUST START!! WHO ARE THE BENEFICIARIES? DO WE:- 1. HAVE A SPOUSE OF THE DONOR? IF YES THEN S7(2) IS TRIGGERED THEREFORE THE DONOR IS TAXED ON INCOME/CAPITAL VESTED IN SPOUSE. [ Reason must be for tax avoidance only!] 2. HAVE A MINOR (BELOW THE AGE OF 18 AND UNMARRIED)? NO?? THEN EITHER MOVE ON OR, TAX THE BENEFICIARY IF VESTED IN BENEFICIARY OR, TRUST IF THE INCOME HAS BEEN RETAINED IN THE TRUST. YES?? IS THE DONOR THE PARENT OF THE CHILD??? NO?? MOVE ON YES???S7(3) IS TRIGGERED - THEN TAX THE DONOR IF VESTED IN THE CHILD 3. HAVE A MINOR (BELOW THE AGE OF 18 AND UNMARRIED) WHERE THE DONOR IS THE PARENT OF OTHER CHILDREN IN ANOTHER TRUST BUT THERE HAS BEEN A CROSS-DONATION [IE: PARENT A DONATED TO TRUST OF B AND PARENT B DONATED TO TRUST OF A] IF NO?? THEN MOVE ON carmenventer@discoverymail.co.za Page 17

18 IF YES?? S7(4) IS TRIGGERED =THEN TAX THE PARENT OF THAT CHILD (NOT THE DONOR)! [IE PARENT A WOULD BE TAXED ON THE DONATION MADE BY B] 4. HAVE A DISCRETIONARY TRUST OR A CONDITION IMPOSED? NO?? MOVE ON YES?? S7(5) IS TRIGGERED TAX THE DONOR ONLY ON THE INCOME/ CAPITAL RETAINED IN THE TRUST. IF THE INCOME/CAPITAL HAS BEEN DISTRIBUTED THEN YOU CANNOT TAX THE DONOR UNLESS OTHER S7 S APPLY [IE LIKE 7(3) FOR INSTANCE]. 5. DOES THE TRUST HAVE A CLAUSE WHEREBY THE DONOR CAN REVOKE ANY INCOME /CAPITAL? NO?? MOVE ON YESS?? TRIGGERED S7(6) TAX THE DONOR WHEN IT VESTS IN THE BENEFICIARY ONLY (EVEN IF HE HAS NOT EXERCISED THIS POWER HE IS TAXED JUST FOR THE FACT THAT THE POWER EXISTS) 6. HAS THE DONOR DONATED INCOME TO THE TRUST (IE BY OWNING A RENT PRODUCING ASSET AND RENTAL PAID TO TRUST)? NO???? MOVE ON YES?? THEN S7(7) IS TRIGGERED AND WHEN INCOME VESTS IN THE BENEFICIARY THEN TAX THE DONOR. 7. HAVE A NON-RESIDENT BENEFICIARY WHO HAS THE VESTED INCOME OR CAPITAL? NO? MOVE ON.. YES? S 7(8) IS TRIGGERED TAX THE DONOR WHEN THE INCOME /CAPITAL VESTS IN THE BENEFICIARY. carmenventer@discoverymail.co.za Page 18

19 TAXATION OF INCOME IN AND DISTRIBUTED FROM A TRUST 1. Discretionary Trust? Yes No 2. Income distributed Yes No See Vested Trust to / vested in Diagram beneficiaries? 3. Donor alive? Yes No Yes No 4.Beneficiary a Yes No Yes No Yes No Yes No minor/ spouse or condition/ revoke non resident? 5. Tax = D B B B D T T T D = DONOR B= BENEFICIARY T =TRUST carmenventer@discoverymail.co.za Page 19

20 . Vesting Trust? Yes No 2. Income distributed Yes No See Discretionary to beneficiaries? Trust Diagram 3. Donor alive? Yes No Yes No 4.Beneficiary a Yes No Yes No Yes No Yes No minor/spouse/ revoke/non resident? 5. Tax = D B B B D B B B D = DONOR B= BENEFICIARY T =TRUST carmenventer@discoverymail.co.za Page 20

21 ` CASE STUDIES CASE STUDY 1 The Mars Trust was formed in terms of Mr Senior Mars will who died 5 years ago. The beneficiaries of the Mars Trust nominated were Junior Mars and Herbert Mars, Mr Senior Mars son and grandson respectively. It was clear from the Trust Deed that neither beneficiary had any vested right to income or capital distribution was left to the discretion of the Trustees. The Trust Deed further stipulates that any amount that remains unpaid shall be capitalized and paid out to the ultimate beneficiaries still to be determined by the trustees. A rent producing property was bequeathed to the Mars Trust by the late Senior Mars. In the 2014 year of assessment, Junior Mars donated interest bearing investments to the Mars Trust. In the 2014 year of assessment the Mars Trust received rental income of R and interest of R The trustees paid out R to Herbert Mars (R rental income and R interest) and R rental to Junior Mars the remainder of R was retained in the trust. Herbert Mars is currently 17 years old. SOLUTION carmenventer@discoverymail.co.za Page 21

22 CASE STUDY 2 Chris donated a rent-producing asset and shares to a discretionary trust. Mary (age 15) and Margaret (age 22), his daughters, are the beneficiaries of the Trust. No beneficiary has any vested right. During the 2014 year of assessment, the Trust earned R rental income and R from local Dividend. The trustees in exercising their discretion distributed to each beneficiary R from rental income and R from dividends. Of the remaining R retained in the trust, an amount of R from rental income had to be accumulated until Mary s 25 th Birthday. carmenventer@discoverymail.co.za Page 22

23 CASE STUDY 3 Ed created a trust for the benefit of his grandchildren Adam who is 5 and Brian who is 30. He donated assets to the trust. The deed provides that the trustees have discretionary powers to distribute capital / income as they deem fit. The deed provides further that any remaining annual income, or gain made by the trustees is to be accumulated for the beneficiaries but, they will only be entitled to receive the income and or capital when Ed dies or when the beneficiary turns 30 whichever is earlier. If any beneficiary dies before their age of 30, the other beneficiaries will proportionally be entitled to that amount. In the 2014 year of assessment, the trust received a taxable income of R from the donated assets as well as, selling an asset and making a gain of R The trustees distributed R to each beneficiary out of the income and R to each beneficiary out of the capital gain. carmenventer@discoverymail.co.za Page 23

24 CASE STUDY 4 Ted creates a trust and donates property. The deed stipulates that rental income must be paid to a PBO. Ownership of the property must be transferred back to Ted if he so notifies the trust in writing. CASE STUDY 5 Tom is founder, co-trustee and potential beneficiary of a family trust. He sells a property to the Trust for it s Market Value of R This transaction is done via an interest free loan account in March 2012 and the amount is still outstanding. Had the Trust been granted this loan by the Bank, it would have paid 10% interest on money loaned. In the year 2014, the Trust, for the first time, earned interest of R and rental income of R A capital gain of R was also realised as a result of the disposal of one of the units in the property. The Beneficiaries of the trust are his wife Jane, daughters Judy age 15 and Pam age 25 who is now a resident in USA. In the same year of assessment, the trustees in this year decide to make no distributions with the exception of R rental income to Pam. carmenventer@discoverymail.co.za Page 24

25 OFFSHORE TRUSTS DEFINITION OF RESIDENT FOR TAX PURPOSES: formed / established & effectively managed in RSA = RSA tax resident a) Remember! Double Taxation agreement takes precedence! b) If the Offshore Trust is truly a non-resident for tax purposes account to SARS if any income is from a RSA source if a beneficiary is a resident in RSA the beneficiary is this income will attract RSA tax taxed on worldwide income/ capital unless income previously subject to RSA tax c) If the offshore trust is resident for tax purposes all amounts received will be subject to tax in RSA TAX AS PER SECTION 25B OR PARA 80 AND ALL SUBJECT TO ATTRIBUTION RULES NOTES: SA Source interest to a non-resident trust will have 15% withholding interest from 1/1/2013 unless from GILTS, SA listed debentures and SA bank held deposits carmenventer@discoverymail.co.za Page 25

26 CASE STUDY CASE STUDY 6 - Example taken from Questions on SA Tax Barry is one of the beneficiaries in a non-resident testamentary trust. During the 2013 year of assessment, the Trust sold foreign property for the equivalent rand profit of R The trust would have realized a capital gain (as per the 8 th schedule) of R if the trust had been a resident for tax purposes. No portion of the profit was distributed to the beneficiaries during the 2012 year of assessment. During the 2014 year of assessment, the trustees decided to vest the full R profit in Barry. carmenventer@discoverymail.co.za Page 26

27 ESTATE DUTY PLANNING Notes on what to look out for when planning for Estate Planning in relation to Trusts NOTE 1 Section 3 (3) Property which is deemed to be property of the deceased includes:- (a) property of which the deceased was immediately prior to his death competent to dispose for his own benefit or for the benefit of his estate. Section 3 (5) which makes reference to above, we see phrases such as: includes profits of any property. has power that would have enabled him to appropriate or dispose of such property as he saw fit if under deed of donation, settlement or trust or other disposition retained the power to revoke or vary provisions....etc etc Alter Ego / Sham Trusts etc Case Law: Jordaan vs Jordaan / Badenhorst vs Badenhorst / Thorpe v Trittenwein / Creighton Trust v CIR Van der Merwe v Van Der Merwe NOTE 2 Loan Accounts in Trust still asset for estate duty purposes although pegged Bequeathing loan accounts in a Will and Testament to the Trust PARA 12(5) of the 8 th Schedule Case law: ITC 1793 / ANNUAL DONATION BEQUESTS TO REDUCE LOAN ACCOUNT?? carmenventer@discoverymail.co.za Page 27