On 13 July 2015, the Davis Tax Committee issued a media statement together with a first interim report on estate duty. The closing date for comments is 30 September 2015, with the relevant legislative amendments to be implemented with effect from 1 March 2016.
The terms of reference for the Davis Tax Committee called for, among others, an examination of the progressivity of the tax system and the role and continued relevance of estate duty. One aspect, which is included in the report, relates to the use of trusts for estate duty planning purposes. The report proposes significant changes to the taxation of trusts in future. It is noted that no capital transfer tax (CTT) or net wealth tax (NWT) is proposed to be implemented at this stage, given the complexities involved.
In summary, the proposed changes to the taxation of trusts are as follows:
- The flat rate of tax for trusts should be maintained at its existing levels.
- The current attribution provisions for taxation of trusts and beneficiaries will either be repealed, insofar as they apply to South African resident trust arrangements, or retained, insofar as they apply to non-resident trust arrangements.
- Trusts should be taxed as separate taxpayers.
- The only relief to the rule should be the “special trust definition”, which allows a trust to be taxed at personal income tax rates in limited special circumstances.
- No attempt should be made to implement transfer pricing adjustments in the event of financial assistance or interest-free loans being advanced to trusts.
The Davis Tax Committee further recommends that:
- Owing to the difficulties of identifying the components of income distributed to a beneficiary, it is recommended that all distributions of foreign trusts be taxed as income.
- The criminal offence provisions of the Tax Administration Act, 2011, be reviewed pursuant to the possible inclusion of separate criminal charges that can be brought against taxpayers who fail to disclose their direct or indirect interests in foreign trust arrangements.
In addition to the changes that the Davis Tax Committee recommends, SARS has published a draft public notice, listing a new reportable arrangement as any arrangement in terms of which a resident makes contributions or payments to a non-resident trust and acquires a beneficial interest in that trust, and the amount of all contributions/payments or the value of the interest exceeds or is expected to exceed ZAR10 million. This will apply in respect of new and existing transactions.
Given the far-reaching effect of the proposed changes to the taxation of trusts, it will be important to consider the implications for existing trusts and the respective beneficiaries. We will follow up on further developments in subsequent newsletters.