In financial planning and wealth management, trusts are seen as invaluable tools. They allow individuals to safeguard assets, plan for the future, and ensure the well-being of their loved ones. However, while trusts offer a plethora of advantages, they also come with a set of tax requirements and complexities, which, if not understood and managed effectively, can lead to unintended financial consequences.

As a South African resident, your tax liability is determined by your age and annual income. If you are under the age of 65, you are required to pay taxes when your annual income exceeds R 95,750. If you have reached the age of 65, your income should surpass R 148,217 to qualify as a taxpayer. Individuals aged 75 or older are liable for taxes when their total income reaches R 165,689.

In this post, we will embark on a journey to shed light on the tax requirements that govern trust funds.

What is a Trust?

A trust is a legal arrangement in which a person (the Settlor/Founder) transfers assets or property to another person or entity (the trustee) to be managed for the benefit of specific individuals or entities (the beneficiaries). Trusts serve various purposes, including wealth preservation, estate planning, and charitable giving. In South Africa, trust funds are subject to specific tax regulations.

Types of Trusts in South Africa

Before delving into the tax requirements, it is important to note that South Africa recognises different types of trusts, each with its own tax implications:

Inter Vivos Trust

One of the most commonly used trust types in South Africa is the Inter Vivos Trust, often referred to as a “living trust.” This trust comes into existence during the settlor’s lifetime, making it an effective tool for various purposes. The settlor, the person establishing the trust, transfers assets into it and designates a trustee to manage those assets for the benefit of specific beneficiaries as outlined in the trust deed.

Inter Vivos Trusts are liable for income tax, and capital gains tax. It’s important to note that the income tax rate for trusts is higher than that for individuals. This makes consulting a tax professional essential when managing assets within an Inter Vivos Trust.

Testamentary Trust

A Testamentary Trust, on the other hand, is created on the date of death of the settlor, typically established through a will. In this case, the settlor’s assets are transferred into the trust according to the terms specified in their will. Testamentary Trusts are subject to income tax, and capital gains tax, and the rates are similar to that of an individual. Seek guidance from tax professionals to ensure compliance with these tax requirements.

Special Trusts

Special Trusts represent a unique category within South African trust law, designed to cater to specific individuals with special needs or those facing extraordinary circumstances. These trusts serve as essential tools for safeguarding the financial interests of beneficiaries in distinct situations.

Charitable Trust

Charitable Trusts are commonly used for charitable donations and philanthropic purposes. The settlor, often an individual or an organization, initiates the trust with the intent of giving back to the community or supporting a particular cause. Charitable trusts may also enjoy tax benefits, as donations made to them can be tax-deductible, subject to specific regulations.

Tax Requirements for Trust Funds

Understanding the different types of taxes associated with trusts in South Africa will ensure you meet the relevant tax requirements.

Income Tax

Trusts are subject to income tax on any income they generate. The income tax rate for trusts is higher than that for individuals, currently at a flat rate of 45%. It’s important to note that this rate can change, so it’s crucial to stay updated on the latest tax regulations.

Donations Tax

If you transfer assets into a trust, donations tax may apply to the Donor. This tax is levied at a rate of 20% on the value of the donation if the Donor is a South African resident. It’s essential to consult with a tax professional to understand the implications of making donations to a trust.

Capital Gains Tax

Trusts are also subject to Capital Gains Tax, which is calculated based on the difference between the proceeds from the sale of an asset and its base cost. Trusts are taxed at 45% on 80% of the capital gain, whereas individuals are taxed at their marginal tax rate on 40% of the gain. While individuals receive certain exemptions and deductions, trusts are taxed at a higher rate, currently at 36%. 

Estate Duty

If the Settlor holds a testamentary reservation in the trust, to determine to whom, how much and when trust assets must be distributed, the value of such assets are deemed to be assets in his personal estate. Trust assets can therefore be included in the estate of the deceased settlor for estate duty purposes, potentially increasing the overall estate duty liability. Proper estate planning is essential to mitigate this tax.

Value-Added Tax

In certain cases, trusts may be required to register for Value-Added Tax, particularly if they engage in commercial activities. Value-Added Tax rates and requirements can vary, so it is important to consult with a tax expert.

Compliance and Reporting

Every trust is required to undergo registration with the South African Revenue Service (SARS) for the relevant tax requirements. The responsibility of ensuring timely submission of tax returns to SARS falls upon the trust’s designated representatives (trustees). SARS has recently introduced improvements to its system aimed at fostering compliance, and trust representatives now have the option to file returns conveniently through the eFiling platform.

The process of submitting tax returns for trusts may appear straightforward, as it involves the completion of the ITR12T form. However, this task can be quite intricate, given the document’s complexity, spanning 31 pages. It is advisable to entrust this responsibility to seasoned professionals with the necessary expertise, which is why you should work with professionals like those at Crest Trust.

At Crest Trust, our team of professionals possess an in-depth understanding of the complexities involved in managing trusts. Our proficiency equips us to facilitate comprehensive filings that align with all SARS compliance prerequisites. Should you require any assistance or guidance, please do not hesitate to reach out to our team, to help you navigate the complexities of trust tax requirements. Crest Trust will ensure that your trust fund serves its intended purpose while avoiding unnecessary tax liabilities.

Since 1 April 2023, every individual who is a Trustee or beneficiary of a trust (excluding testamentary and special Trusts) is now required to comply with the requirements of Schedule 1 of the Financial Intelligence Centre Act 38 of 2001 by filing the necessary documentation with the Master of the High Court.