Taxes and trusts

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A Fin24 user wants to know more about the 40% tax on trusts. She writes:

A trust pays 40% income tax. I would like to know whether it is 40% on all income, or 40% on profit?

Fiduciary Institute of South Africa member George
Enslin, director of MTP (SA) and of GFE Financial, responds:

Please note that a trust pays 40% on all income (taxable income) declared.
 
This will include (but is not limited to):

• All investment income (interest income, foreign interest, foreign dividend income and taxable capital gain), as well as
• Income (taxable profit) from trading activities.

*Please note this will be 40% tax on the net profit, and not turnover (gross income) as raised in the question.
 
Example:

1. Interest earned: R10 000
2. Local dividend income earned: R10 000 (this will be taxed at 15% dividend tax before paid to the trust, the amount received by the trust will not form part of the 40% tax calculation)
3. Foreign dividend: R15 000
4. Foreign interest: R15 000
5. Capital gain: R50 000
6. Trading activities: R50 000 turnover
7. Trading expenses (deductible expenses in terms of Section 11 of the Income Tax Act): R20 000
 
No distributions were made to any beneficiaries, and therefore all income will remain taxable in the trust.
 
Solution:

Total taxable income: R95 000 (1+3+4+5+(6-7) as stated above.
 
Further notes:

• Interest earned: R10 000 at 40% tax: R4 000 tax payable
• Local dividend: R8 500 paid to trust after dividend tax deducted (a certificate will be issued to the trust reflecting the dividend tax credit)
• Foreign dividend: R15 000 at 40% tax: R6 000 tax payable
• Foreign interest: R15 000 at 40% tax; R6 000 tax payable
• Capital gain: R50 000 * 50% inclusion (50% for 2013 tax year and 66.6% for 2014 tax year): R 25 000 at 40% tax: R10 000 tax payable
• Trading activities net profit (income R50 000 minus expenses R20 000): R30 000 at 40% tax: R12 000 tax payable.
 
Total tax payable: R38 000.
 
Should you require any additional information please feel free to contact our offices.

 - Fin24

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