This is the question everyone who has a trust (or who considers creating a trust) is asking at the moment. During July of this year draft legislation was issued in terms of which a person (if he is a connected person in relation to the trust) will have to charge interest on a loan account to the trust at the official rate (currently 8%).  If interest is not charged or if it is charged below the official rate, imputed interest will be added to the income of the person making the loan, resulting in higher income tax payable by him. The imputed interest will be the amount equal to the difference between the amount incurred by the trust and the amount that would have been incurred by the trust at the official interest rate. Such additional tax (on the imputed interest) paid by the holder of the interest-free loan must also be recovered from the trust within three years as failure to do so will result in a donation to the trust incurring donations tax. Such imputed interest will not qualify for the interest exemption by the holder of the loan account nor will it be allowed as a deduction in the trust if the trust does not earn taxable income. The holder of the loan account will also not be able to reduce the loan account by donating R100 000 per annum to the trust if no interest is charged on the loan account. If however interest is charged on the loan account this will be allowed.

Furthermore, the Second Report on Estate Duty and Taxation of Trust by the Davis Tax Committee which was released on 24 August 2016 contains recommendations that the conduit principle applicable to trusts and as provided for in sections 7 and 25B of the Income Tax Act be removed.  These sections make provision for income earned by the trust to the taxed in the hand of the beneficiaries or the donor on their individual tax rates instead of being taxed in the trust at the higher 41%. The same also applies to capital gains tax. This will unfortunately make people think twice about having a trust. The said DTC report also contains some other recommendations regarding Estate Duty, Donations Tax and Capital Gains Tax which will not be discussed in this newsletter but keep an eye out for future newsletters. It is however important to note that the provisions of this report are only recommendations at this moment and has not yet made their way into legislation.

Although the taxation of trusts is an important factor when it comes to the decision of whether one should have a trust or not, it should not be the main reason. The most important reason why one should have a trust is for risk-protection purposes (including protection against business or personal creditors, professional or delictual claims against you or personal relationships going sour) – any tax advantages that trusts offer is a bonus. 

Because each person's circumstances are different, it is recommended that you consult with your  attorney who specialises in the field of Estate Planning to assist you with your holistic estate plan.