FUNDAMENTACIÓN TEÓRICA

As discussed elsewhere in this research report373_{, some of the initial recommendations}

contained in the DTC’s First Report included a repeal of both s 7 (attribution principle) and s 25B (conduit principle) with regard to trusts and for distributions from foreign trusts to residents to be treated as income regardless of the source of such income.

These recommendations were heavily criticised by various professional bodies374_.

In a SAIT webinar presented by Judge Dennis Davis375_{, who heads up the DTC, he stated}

that the recommendations in the First Report regarding the taxation of South African trusts in particular will be abandoned and that the conduit principle (s 25B) and the attribution principle (s 7) will therefore remain unchanged. He further mentioned that the

recommendation with regard to foreign trusts was also incorrect and that distributions will continue to be taxed according to the nature of the income received in the foreign trust if distributed to residents (as currently governed by s 25B(2A) and para 80 of the Eighth Schedule to the Income Tax Act).

In addition, the wording of para 80 of the Eighth Schedule to the Income Tax Act, which deals with capital gains distributed to trust beneficiaries, will be refined in order to correct some of the deficiencies in the wording of this paragraph which currently results in most distributions from capital gains received by resident beneficiaries from non-resident trusts which occurs in the same tax year as when such gains arose, to be excluded from a beneficiary’s aggregate capital gain or loss, as discussed in chapter 4.6.5 above. Judge Davis also mentioned that a recommendation will be made in the Second Interim Report on Estate Duty (still to be released) with regard to redrafting s 3(3)(d) of the Estate Duty Act to deem a trust’s property to be that of a deceased’s estate if the deceased had a sufficiently large loan account owed to him or her by the trust which would constitute the deceased having had de facto control over the trust assets.

The 2016 Budget Review contained a paragraph, ‘Tax treatment of trusts’, which

suggested however that if the founder transferred assets to a trust in exchange for a loan account due to the founder (possibly regardless of whether such loan account is interest- free or not) then all trust assets will be regarded as deemed property in the estate of the

373 _{Refer chapter 1.1}

374 _{Refer chapter 4.8} 375 _{Davis 2015}

founder upon his or her death regardless of the size of such loan account376_{. Furthermore,}

this paragraph indicated that assets transferred to a trust through an interest-free loan account will be categorised as a donation. Although clarity is still required this may mean that s 7 of the Income Tax Act (with regard to trust income) as well as paras 69 to 72 of the Eighth Schedule to the Income Tax Act (with regard to capital gains in trusts) may apply in such cases377_.

It would be deemed unfair however for such a transfer to attract both donations tax upon initial transfer as well as estate duty on death as these two taxes are under normal circumstances intended to be mutually exclusive. Donations tax is levied on transfers made from a taxpayer’s estate to compensate the tax authorities for the loss in estate duty that will be suffered due to the reduction of the taxpayer’s estate as a result of the

donation, hence the fact that the donations tax rate and estate duty rate are normally the same.

As neither the suggested legislation nor the Second Report on Estate Duty has been released to date, more clarity is required with regard to the intended working of the new changes being recommended to fully understand the possible taxation consequences. If the proposed legislation is going to result in a higher expected estate duty and CGT liability for a founder of a trust, the founder will be required to plan for the provision of liquidity in his or her estate (typically through the use of life insurance policies378_{) in order}

for the executor to be able to pay the tax liabilities without requiring estate assets to be sold to raise the necessary cash. For founders who may be too old to take out additional life insurance to provide for an increased tax liability in the immediate to near future, such legislative changes may therefore result in hardship for their surviving spouse and family members who may be dependent on the estate assets for income after his or her death. It remains to be seen if any of the proposed new legislation will be applied to existing structures or even retrospectively to any transfers done to trusts via loan accounts in the past. In the DTC’s First Report, the Committee was not in favour of allowing taxpayers a grace period in which to dissolve their trust structures prior to the implementation of the suggested legislation changes (repeal of conduit principle and attribution rules)379_{. As trust}

structures are typically entered into for long time horizons across the lifetime of more than one generation, such a sudden change to existing legislation will result in a massive effort from both taxpayers and their tax practitioners to restructure affected taxpayers’ affairs in

376 _{Department of National Treasury 2016a:49} 377 _{Department of National Treasury 2016a:49} 378 _{Foster et al. 2015:5 (para 2.2)}

a manner that will not undo the careful planning done over many years prior to such a change to achieve the preservation of hard-earned wealth for future generations.

4.7.8 Conclusion

This section discussed some of the tax consequences (estate duty, donations tax and income tax) for taxpayers when interacting with South African and offshore trusts in certain ways in order to provide background and an understanding of the context in which the recommendations of the DTC’s First Report were made, for the comments submitted by professional bodies on the DTC’s First Report and for the new recommendations discussed by Judge Davis to be contained in the Second Report and those contained in the 2016 Budget Review.

This section set out both the non-tax-related reasons for using trusts as well as the manners in which assets are transferred by founders to trusts. The section furthermore discussed the uses of and considerations for beneficiary loan accounts due by trusts, the concept and mechanisms of income-splitting in resident trusts which the DTC intends to curb with their various proposals as well as additional considerations for resident beneficiaries of non-resident trusts. Finally the potential consequences of the various recommendations by the DTC and the 2016 Budget Review were briefly considered.