To Trust or not to Trust? advertorial

2015-09-09 06:00

AMANZIMTOTI Amanzimtoti accounting firm, Amalgamated Financial Services (Pty) Ltd, has recently thrown in its lot with the countrywide and international specialised accounting services group, Lumenrock and in terms of this merger they can call on the group’s diversified levels of expertise to supplement their services.

Today’s article is about Trusts and the possible changes in tax legislation.

To Trust or not to Trust.

Article written by Neil Oberholzer and adapted from an article by Professor Willie van der Westhuizen, first published by Millers Attorneys on 23 July in their electronic newsletter, full copyright acknowledged.

As long ago as 1789 one JB Le Roy wrote: “In this world nothing can be said to be certain, except death and taxes.”

When both these certainties hit you at the same time in the form of death duties or estate duty, you can be sure that those left behind will wonder where the money for the taxman will come from. Valuable family assets have in the past turned into the taxman’s money due to bad planning and forced sales. In the past most of the agony was spared by using the right tools such as a family Trust for the family valuables or life insurance, or at least, this has been the case for the past decade and more, but what about the future, now after the publication of the First Interim Report on Estate Duty by the Davis Tax Committee (DTC) on 13 July.

The DTC regards estate duty (and its “lifetime partner”, donations tax) as wealth taxes and a bit sanctimoniously states in its report that “taxpayers must be allowed to make use of Trusts when it makes sound sense to do so in pursuit of a commercial justification or benefit, as opposed to an estate duty benefit.”

However, the saving of estate duty will at any stage make sound sense to a hardworking wealth building entrepreneur who can easily pull out huge files of commercial justification to do so in order to retain the expanding family business in the hands of his family

Although the report on its face value contain some soothing elements and statements as indicated here, it also contains some stings which the average wealth-builder has to take cognisance of. Important also to remember is that the report only contains recommendations and that some of the recommendations will not see the light of eventually becoming legislation.

The DTC acknowledges the fact that through interest-free loans to Trusts (and thus pegging the growth in personal estates) the Trust is the ideal vehicle to “park the wealth” during the wealth-builders’ lifetime, and to diminish estate duty upon his or her demise. It is therefore not surprising that the DTC, with its objective to look at means to prevent the erosion of the tax base (and to generate more revenue) that it will recommend that the “parking of the wealth” in the Trust be made unattractive and that if and whenever the wealth is moved out of the Trust, that capital gains tax (CGT) has to do its bit to neutralise the loss in estate duty because of the reduced wealth in the deceased estate.

The DTC’s view is that CGT is not a wealth tax and therefore can take its place alongside estate duty (even upon a person’s demise) and to make the “parking of the wealth” in the Trust as unattractive as can be, the recommendation is to scrap the so-called attribution rules in section 7 and 25B. Subject to quite complicated rules, section 7 deems the Trust or beneficiary income to be that of any donor to the Trust and as an opposite, section 25B deems the Trust income under certain circumstances to be that of the beneficiaries.

With the scrapping of the latter the idea apparently is to close the “pipeline” through which the income of a Trust can flow to a beneficiary and not be taxed at the 41% tax rate of the Trust. This might be easier said than done because a mere scrapping of the “culprit” section 25B will not do the trick of closing the pipeline. It will require much more complicated “footwork” than that. This section 25B was introduced into the Income Tax Act in 1991 some 20 years after the “pipeline” was finally opened when the Rosen case was decided in 1971 in the appeal court and the so-called “conduit principle” finally confirmed (before that the principle had already been introduced as long ago as in the Armstrong case in 1938 and earlier cases).

The question then remains – to Trust or not to Trust? In other words, assuming the legislator will eventually succeed to legislate the well embedded conduit principle of the common law out of the tax laws of Trusts, the question then is will the Trust still have a place in the family estate plan? It appears to be so especially where low-income-generating fast-growing assets (wealth) or other family assets, such as a family farm or family holiday home, etc., is “parked” in the Trust for a generation or more.

The Trust with assets with low income, thus low “parking cost” in the Trust, will allow the wealth to be neatly kept away from wealth tax in the form of estate duty as well as especially safeguarding the family valuables from whoever wants to prey and vulture on it. The answer is therefore “yes trust the Trust to still be the protective vehicle or “parking place” for wealth as in the past, but if you want to save on “parking cost”, good planning will be needed to select the right kind of estate planning vehicle and assets to be kept in trust.

Lumenrock South Coast can assist with all manners of tax planning and advice on the use of Trusts as potential tax havens

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