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.
An interest free or low interest loan advanced to a trust by a connected person will result in such a person being regarded as having effective control over the trust. The committee recommends that such a connected person be subject to income tax on the interest on such loans at a rate not lower than the official rate of interest (currently at 8%). ‘n Further recommendation is for the anti-avoidance rules in the estate duty legislation to be amended in order for the underlying assets held in the trust to be included in the estate of the connected person at his or her death. This means that the assets would be subject to estate duty at 20%.
The committee’s recommendation is that the so-called conduit principle and attribution rules, which governs distributions and allocations from discretionary trusts for tax purposes, should be repealed. The result of this will be that where an asset is owned by a discretionary trust, the trust will be taxed as a separate taxpayer on the income and capital gains until such asset is sold or finally vested in a beneficiary. The tax rates for trusts are currently levied at 41% on income and 32,8% on capital gains. Distributions of income and capital gains to individual beneficiaries are currently taxed at lower rates. For individuals these rates are calculated using a sliding scale up to a maximum of 41% on income and 16,4% on capital gains.
With regard to offshore trust structures, the committee conceded that these structures hold benefits for planners and that it would be difficult to limit the benefits as well as the abuses. The committee believes, however, that such structures will be exposed by the international exchange of tax information between countries which is set to commence in September 2017.
The committee recommends that special provisions be included in the Tax Administration Act in order for criminal charges to be laid against taxpayers who fail to disclose their interests in offshore trust structures and that such provisions be strictly enforced. The committee seems furthermore to stick to their recommendation that all distributions to South-African beneficiaries from offshore trust structures be taxed as normal income in future.
The committee made several other important recommendations including the increase of the primary exemption on estate duty to R15 million per person from the current R3.5 million, the increase of the estate duty rate for estates exceeding R30 million from the current 20% to 25%, as well as a recommendation to thoroughly investigate the taxation of offshore retirement schemes.
Some commentators are of the opinion that, as in the case of the Margo Commission (1987) and the Katz Commission (1997), very few of the abovementioned recommendations, especially those with regard to trusts, will eventually be passed into legislation. Such a view does not, however, take into account the prevailing political and economic conditions which are vastly different from those that applied back then. Moreover, the Minister of Finance has instructed the committee to investigate other forms of wealth taxes. This report is expected to be released later this year.
Tenk (FH) Loubser is a director of TLA Wealth and Advisory Services. view profile>
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