Find our insights below to help you understand the relevant issues that may affect your wealth and business structures at present. Feel free to contact us should you like to learn more about any of the content below or want to understand how these issues affect the decisions you make about your personal, family and business structures.
Going forward, existing and new South African discretionary trusts that have loans owing to connected persons (persons with a direct or indirect interest in the trusts) may not enjoy the same protection against estate duty as is currently the case.
This will be the result if the recommendations made by the Davis Tax Committee (“the Committee”) in its second and final report on Estate Duty to the Minister of Finance are accepted and promulgated in tax legislation by Parliament.
After a long period of uncertainty regarding what the legislator had in mind with regard to the taxation of trusts, the proposed tax law amendments were released for commentary last week.
Interest-free loans to trusts will remain free of donations tax and will continue to contribute to a reduction in estate duty but such loans will now be subject to income tax under the new section 7C of the Income Tax Act.
Treasury may not have increased tax rates affecting high-net-worth individuals as was expected by many analysts but proposals were made in this year’s budget review which are tantamount to wealth taxes. The proposed manner in which trusts will be taxed going forward will have a significant effect on the way that affluent South African families organise their affairs in the future.
The first proposal is to increase the inclusion rate of capital gains for companies and trusts from 66,6% to 80%. The inclusion rate is the percentage of the annual capital gains to be included in taxable income where it will be taxed at normal income tax rates. An inclusion rate of 80% means that capital gains in trusts will effectively be taxed at 32,8% whereas normal taxable income will be taxed at 41%.
The recommendations of the Davis Tax Committee (DTC) regarding the way trusts should be taxed going forward may mean that trusts will no longer be the best vehicle for preserving wealth over the long term. The DTC released their draft report on all aspects of wealth taxes in South Africa on 13 July 2015.
The DTC looked among other things at the way that trusts are taxed in South Africa and noted that the attribution rules as contained in s. 7 of the Income Tax Act were added to the Act at a time when the maximum tax rate of individuals was much higher than that of trusts. It therefore made sense for individuals to transfer income-producing assets to trusts in order to save tax.
Wealthy South-Africans are often advised to invest offshore. Offshore investments that are done with the assistance of experienced and reliable financial advisors and asset managers may have certain advantages.
To ensure a successful and problem-free investment, an important aspect to consider is the tax implications. There are several ways in which an offshore investment can be done. Each option has different tax implications and it is important to understand these and plan accordingly.
