People have registered trusts in the past for various reasons. At one stage, it was even fashionable in SA to register a trading trust which operated just like any business. However, unfavourable tax rates have forced business owners to move away from these sort of uses and trusts are predominantly registered nowadays as a vehicle to preserve your wealth for your family and children. It is important to note that there are two types of trusts, namely:
- Testamentary trusts
- Inter-vivos trusts
These are discussed in further detail below, but, first some basic information.
How to Register a Trust?
A trust is recognised as a separate legal entity by law in SA. It can sue and be sued in its own name. Unlike companies (which are registered at the CIPC), trusts are registered with the Master of the High Court.
What is Needed to Register a Trust?
Trustees need to be appointed and beneficiaries need to be specified. Details of the trustees, beneficiaries, their powers and other functioning of the trust must be laid out in a trust deed which should be submitted to the Master of the High Court upon registration. Trustees are tasked with the administration of the trust and must comply with the Trust Property Control Act, which determines how trusts should be administered and the role of the trustees (failure to comply with this Act may mean facing criminal prosecution). Trustees have a responsibility to always act in the best interests of the beneficiaries and the trust. Trustees are not allowed to make personal profit from the trust, should be objective when administering trust assets and always should always act in good faith. Beneficiaries are the individuals who are to benefit from the trust and can be one or a few individuals or even a class of people e.g. anyone who is underprivileged - the details of the beneficiaries and how they are entitled to benefit will also be laid out in the trust deed.
Types of Trust
Testamentary trusts are formed from the will of a deceased person. In the case of a testamentary trust the deceased’s last will serves as the trust document.
Intervivos trusts are created between living persons and are usually established to preserve wealth for your decendants and can effectively be used to limit Estate Duty upon your death. The typical example here are your regular "family trusts". There are specialist trust administration companies which assist with setting up intervivos trusts and are also empowered to administer them as trustees.
Special trusts are taxed on the same sliding scale as individuals - these are trusts set up for special events e.g. welfare of a person injured in a motor vehicle accident. All other trusts are taxed at a fixed rate (currently the maximum rate applicable to individuals).
Section 7C of the Income Tax Act came into effect on 1 March 2017 and applies where a loan is made available to a trust, no interest is payable on the loan, or interest is payable at a rate lower than the official rate of interest contemplated in the Seventh Schedule to the Income Tax Act (currently 8%), and the loan is made available (whether directly or indirectly) to the trust by a natural person or a company that is a connected person in relation to that natural person, and the natural person or any person that is a connected person in relation to that natural person, is a connected person in relation to the trust.The effects of the application of section 7C would be as follows:
- any interest forgone by the taxpayer in respect of the interest free or low interest loan would be treated as an ongoing and annual donation to the trust (which may be subject to Donations Tax); and
- no deduction, loss, allowance or capital loss may be claimed by the taxpayer in respect of the interest free or low interest loan made to the trust.
It is important that you set up your trust correctly from the start. At The Tax Shop, we are able to advise you on the necessity of setting up a trust and will also assist you in making the registration process hassle-free.