For tax purposes, a trust is considered to be a separate “person”. A trust will be considered to be resident for tax purposes if it is incorporated, established, formed, or has its place of effective management in South Africa.
Depending on the circumstances, trust income can be taxed in the hands of the donor, beneficiary, or the trust.
Recently, the government has introduced a series of punitive tax measures to discourage people from using trusts. Trusts still, however, promise potential savings in estate duty upon your death, as well as the benefit of protecting your assets. Although higher tax rates for trusts apply to income and capital gains retained by the trust, the trust is always the taxpayer of last resort.
Trusts (excluding special trusts)
For regular trusts, the tax rate is 45% and the Capital Gains Tax rate is 18%.
If a connected person has made a donation or interest-free loan to the trust, all income made resulting from such a donation will be taxed in the hands of such person until his/her death.
Capital Gains Tax is payable in the trust at an effective rate of 36%, and there are no abatements, similar to that for individuals.
A special trust is one created solely for the benefit of a person affected by a mental illness or serious physical disability that prevents that person from earning sufficient income to maintain himself/herself. Where the person for whose benefit the trust was created dies prior to or on the last day of the year of assessment, the trust will no longer be regarded as a special trust.
A special trust can also be a testamentary trust established solely for the benefit of minor children who are related to the deceased on the date of death. When the youngest beneficiary turns 18 years old prior to or on the last day of the year of assessment, the trust will no longer be regarded as a special trust.
Special trusts are taxed at the rates applicable to individuals but are not entitled to any rebate. The 40% inclusion rate for a taxable capital gain applies to both types of special trusts.
For special trusts, the income tax rate is the same as those applicable to individuals, but they are not entitled to any rebate. The 40% inclusion rate for a taxable capital gain applies to both types of special trusts.
Registration for VAT
A trust must register for VAT if an enterprise has taxable supplies, goods or services subject to VAT – of more that R1 million are made in any 12-month consecutive period. A trust making taxable supplies of less than R1 million may register voluntarily.