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Many people have a trust, but often dont know what to do with it, nor are they aware of or comply with the legal requirements. Even if the Trust has no Taxable Income, must certain requirements be complied with, which if not done could result in penalties .... and more penalties, interest and hassles in the long term when the Trust is wound up.
This note attempts to clarify some of the issues, allowing you to handle some of the routine matters yourself, but there is always merit to approach a qualified accountant for advice and guidance in managing your Trust.
WHAT IS A TRUST
- A Trust is a seperate juristic / legal entity (like a PTY-LTD or CC company), governed by the Trust Property Control Act. It is a special kind of legal entity that caters for the senerio where there is a Founder, Benficiaries and Trustees.
+A Trust comes into existence when registered with the Master of the High Court, who oversees the activities of the Trust.
-Each Trust has it's own founding document, called a Trust-Deed, which caters for the specific needs of the Trust, and governs all it's activities. The Trust-Deed specifies among other things .....
+who the Founder is, that normally loans or donates an asset (or money) to the Trust, and largely contains the wishes of this person.
+who the Beneficiaries are, and how / when they should benefit from the Trust.
+who the (initial) Trustees are that must act on behalf of and administer the Trust, and what authority and duties they have. Trustees may only begin to act in such capacity after being appointed by the Master of the High Court by way of a "Letter of Authority".
-Two main types of Trusts exist, but are in many other ways similar.
+Inter-Vivos trust, created by the Founder during his/her lifetime.
+Testamentary trust, created ito. the Testament of a person, normally to provide for under-age beneficieries.
PURPOSE / ADVANTAGES OF A TRUST
-The purpose of a Trust (in general) is to place certain assets in, and/or route certain finacial matters through a seperate legal entity, with the more specific purposes .....
+To make provision for minors.
+To facilitate the growth of assets in the hands of such minors, in a (legitimate) attempt to reduce Estate Duty.
#Note that the Equity value (Assets - Liabilities) from growth of a Trust being in a separate legal entity, cannot be attached by the creditors of the Founder in case of his/her insolvency.
DISADVANTAGES OF A TRUST
-Effort and cost to have a trust deed drawn up to suit your particular objectives, and registered.
-An additional entity that must be accounted for, costing extra money.
-Higher tax rates than for companies (PTY-LTD's and CC's).
INCOME TAX AND TRUSTS
-A trust, like any other person or legal/business entity, must pay Income Tax on it's profit / Taxable Income.
-All trusts must be registered for Tax purposes with SARS, and all Trusts have February as it's Year End Date.
+All Trusts must also be registered as Provisional Tax Payer, and hence MUST pay and/or submit the 1st and 2nd Provisional Tax Return, even if there is no payment to be made, or no Taxable Income on which Income Tax must be paid.
- The Tax situation differs depending on it's "Tax Status".
*Income Tax is calculated at a rate of 40% of Taxable Income.
*Capital Gains Tax (CGT) is calcualted at 50% of the Capital Gains that must be incorporated into Taxable Income.
-Although the tax rate on Trusts is generally higher than on Individuals and Companies, it is noteworthy that unlike an individual that cannot claim certain expenses as deductions against Income, that a Trust (and a company) can, ie. interest paid on a loan (to finance a house).
-Comparing the above with the taxes on Companies and Individuals, may taxes be higher or lower depending on a range of factors. So, all factors need to be taken into account before creating a Trust, to establish whether there is a clear advantage, and whether the ends (wanted to be achieved with a trust) justifiy the means (costs involved).
Pierre Leon Myburgh