For taxation purposes there are three parties to a trust, namely:

• the donor;
• the trust; and
• the beneficiaries.

The Income Tax Act is written in such a way as to firstly tax the donor, secondly the beneficiaries and thirdly (if neither the donor nor the beneficiaries were taxed) the trust.

The tax rate applied to a trust is 40% compared to the rates applicable to the donor or beneficiaries which can vary depending on the tax scales which relate to the particular individuals.

Section 7 of the Act also has various anti-avoidance rules applicable to a trust.

The trust deed, as well as sections 7 and 25 of the Act, should be carefully considered when dealing with the taxes of a trust.

Interest-free loans to a trust

It is common practice to form a trust and loan money to that trust on an interest-free loan account.

The individual loaning the money to the trust therefore has a loan receivable in his accounts where as the trust has a loan payable (liability).

The trust can use the money at its discretion.

As time passes, the individual who loaned the money to the trust will annually donate a portion of the debt to the trust thereby reducing the liability to the trust.

There are however a few problems with this structure. Should the individual pass away, the outstanding balance of the loan receivable will be included in his/her estate making it liable for Estate Duty.

Furthermore, the concept of an interest-free loan and its tax consequences has been challenged in court.

The outcome is that there is no such thing as an interest-free loan bar the exception.  The lender will therefore have to calculate deemed interest received based on the interest rates provided by SARS and include this amount in his/her tax return as gross income.  The trust on the other hand will not be allowed the deduction of paying deemed interest as this amount was not actually incurred.

SOURCES :

Cronje & Cronje

Business Partners