Trusts serve various purposes, including business operations, estate planning, asset management, and special needs support. It’s important to understand that, under the Income Tax Act, a trust is treated as a ‘person’ and is therefore subject to income tax obligations. Proper management of a trust’s tax affairs ensures compliance and avoids potential penalties.
Registration and Tax Obligations of Trusts
A trust must first be registered with the Master’s Office. Once created, the trust must register for income tax with SARS (South African Revenue Service). A trust is required to submit tax returns, whether it generates income or not.
Income Tax Rates for Trusts
The tax rate depends on the type of trust:
- Ordinary Trust: Taxable Income is taxed at a flat rate of 45%.
- Special Trust: Taxed on a sliding scale (18% to 45%) like natural persons, depending on income earned.
Types of Trusts
– Ordinary Trusts: Includes Inter Vivos Trusts (created during the founder’s lifetime) and Testamentary Trusts (created through a will). These are often used for estate planning, asset management, or inheritance management for beneficiaries.
-Special Trusts: These are created for specific purposes:
-Trusts for individuals with disabilities.
-Testamentary Special Trusts: Established in the will of a deceased person for the exclusive benefit of their family members or beneficiaries.
Tax Types Applicable to Trusts
Below are the different taxes a trust may be subject to:
– Provisional Tax: Trusts that qualify as provisional taxpayers must register for provisional tax on e-Filing.
– Income Tax: Trusts pay income tax at 45. Inactive trusts must still submit nil tax returns.
– Capital Gains Tax (CGT): Applied when a trust disposes of assets, with 80% of the gain included in taxable income.
– Securities Transfer Tax: Levied on the transfer of securities at 0.25% of the security’s taxable amount.
-Transfer Duty: Payable on a sliding scale, depending on the value of property being transferred to the trust.
-Donations Tax: This can occur in two forms:
-Actual Event: Triggered when a donor transfers property to the trust with no expected return or interest.
-Deemed Donation: Occurs when property is transferred through low-interest or interest-free loans. The difference between the official interest rate and the loan rate is considered a donation, subject to donations tax.
– Payroll Taxes: If a trust employs staff, it must also comply with PAYE (Pay-As-You-Earn), the Skills Development Levy (SDL), and Unemployment Insurance Fund (UIF) requirements.
Why Proper Tax Management is Crucial for Trusts
Trusts are valuable tools for estate planning, asset protection, and supporting loved ones, but they come with significant tax obligations. Failure to comply with tax laws can result in penalties, so it is essential to ensure that your trust is registered with SARS and properly managed.
If you are unsure about your trust’s tax obligations, it’s advisable to seek the assistance of a professional tax practitioner to avoid unnecessary risks and ensure full compliance.
