FANews
FANews
RELATED CATEGORIES
Category Life Insurance

New proposed trust legislation: Hit or miss?

30 August 2016 Tertius Troost, Mazars
Tertius Troost, Mazars Tax Consultant, CA(SA), M.Acc (Tax)

Tertius Troost, Mazars Tax Consultant, CA(SA), M.Acc (Tax)

A considerable amount of discussion has occurred in the tax sector following the proposed amendments to the trust legislation - put forth in the draft Taxation Laws Amendment Bill (“TLAB”). Upon closer scrutiny of the proposed amendments, it seems as if the legislation has missed the goals set by the Davis Tax Committee’s Report on Estate Duty (“Davis tax report”). Most notably, the goal to close the wealth gap in South Africa.

The Davis tax report highlighted how the rich are getting richer and the poor are getting poorer by quoting alarming statistics about the Gini coefficient (an international standard for measuring the distribution of income and wealth in a country) along with paragraphs from well-known economist, Thomas Pikkety. Specific mention was made of Pikkety’s theory that the unequal ownership of assets, as opposed to unequal earnings, is the driver of income disparities. In other words, the transfer of wealth from one generation to the next is the biggest culprit of wealth inequality. 

For years, estate duty (a tax levied on the value of net assets at date of death) could be minimised or completely circumvented by the use of interest-free, or low interest loans to discretionary trusts. Currently, the sale of assets to trusts on interest free loan account does not attract donations tax, because it is not a disposal motivated by ‘pure liberality’ or ‘disinterested benevolence’ - the asset is sold to the trust at market value and the consideration remains owing on loan account (i.e. the purchaser is under an obligation to repay the amount). 

The loan, which is an asset in the estate of the seller, can be whittled away over years by making use of the R 100,000 donations tax exemption. Thereby, reducing the value of the estate of the person who owned the asset. Furthermore, since the asset is in the trust, the growth of the asset will not be subject to estate duty. 

The draft TLAB aims to curb the selling of assets to a trust on interest-free or low interest bearing loans. In order to achieve this, it proposes to include in the taxable income of the seller (i.e. the holder of the loan), an amount equal to the difference between the interest that would arise as determined with reference to the official rate of interest (currently 8%) and the actual interest rate of the loan made to a trust. This amount cannot be deducted by the trust, since it was never paid by the trust, and the seller will not be allowed to utilise the interest exemption against this notional interest. Furthermore, the proposed section 7C(5), will disallow the use of the R100,000 per annum donations tax exemption in order to reduce the loan balance. 

So, does this eliminate the use of trusts and reach the goal intended by the Davis tax committee to close the wealth gap? Not necessarily. 

Over the years taxpayers have been able to accumulate wealth in trusts according to the methods explained above. Even though the draft TLAB makes this practice look unattractive, the practice of passing on the wealth already accumulated in trust from one generation to the next is left unaffected. By making use of the attribution rules and the donations tax exemption, a taxpayer who has already accumulated large amounts of money in trust and extinguished their loan account can keep building investments by distributing income to its beneficiaries and having beneficiaries donate these distributions back to the trust. 

The up and coming South African middle class, who the Davis tax committee is trying to uplift and enrich, will however no longer have this tax planningtool available to them. So one ends up in the same position as before: the rich becoming richer and the poor still not catching up. 

Quick Polls

QUESTION

How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?

ANSWER

Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now