Trusts on Treasury’s radar

Despite National Treasury’s silence on proposed changes to trust legislation in Wednesday’s Budget, a review is still firmly on the agenda, tax experts say.

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Last year Treasury proposed several changes to trust legislation as a means to curb tax avoidance linked to trusts. It indicated that “certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their flexibility and flow-through nature”.

Treasury also voiced its concern about the use of trusts to avoid estate duty.

However, when the tax amendment bills were published in July, it said more consultation was required and that it would be “dealt with later this year (2013) or as part of next year’s (2014) process”.

Di Seccombe, national head of tax training and seminars at Mazars, says at the moment Treasury is waiting for suggestions from the Tax Review Committee before any further significant tax changes are made.

Trusts fall within the ambit of the committee’s mandate, which includes a review of wealth tax, estate duty and capital gains tax.

Potential changes are still on the agenda, she says.

Seccombe says there are also rumblings that a new tax return for trusts will be introduced. If such a return is similar to the company tax return currently in use, it will create challenges. Seccombe expects that more disclosure will be required in such a scenario.She advises taxpayers to be proactive and to ensure that their trusts are in order and that all administration is sound, valid and done on time.

Flow-through scrapped?

Last year’s budget proposal indicated that Treasury did not want discretionary trusts to act as flow-through vehicles any longer and that taxable income may in future be calculated at a trust level. This proposal led some commentators to speculate that the conduit (flow-through) principle might be scrapped.

The conduit principle means that if the income or capital gains of a trust is distributed to a beneficiary in the same year of assessment, the income or capital gains will be taxed in the hands of the beneficiary at the beneficiary’s specific tax rate(s) and not at a trust level.

Prof Jackie Arendse, chairperson of the South African Institute of Tax Practitioner’s Education Committee and former head of the School of Accountancy at the University of the Witwatersrand, says the conduit principle is quite a complex aspect of the law and a well-entrenched principle in legislation.

She says while anything is possible, she can’t see it being scrapped. There are lots of complexities around trusts and many different types of trusts which make it difficult to come up with one firm rule on how it should be taxed.

Ronald King, head of technical support at PSG Wealth, emphasises that trusts shouldn’t be created specifically to save tax.

It should rather be used as a vehicle to protect assets and to ensure continuity, he says.

Credit: Citizen