27 February 2013 – the day on which the Rubicon was crossed as far as the taxation of trusts is concerned.
Although not much was said, we heard enough in Minister Pravin Gordan’s budget speech that day to know that things are about to change. At stake is the conduit principle that is currently applied with regard to trusts and which ensures that income earned retains its nature when redistributed. In terms of proposals made in the budget speech, the conduit principle might fall away.
While we expect draft legislation to be published sooner rather than later, we thought it prudent to explain the anticipated changes in basic terms by means of an example:
Mr A’s family trust realises capital gain of R1 000 000 and interest income of R100 000 in the current year of assessment. He is 58 years of age, has no other taxable income in his personal capacity, and he has four grandchildren. We have already established that the trust will be distributing income to these five individuals (Mr A and his four grandchildren), to achieve maximum tax efficiency.
The consequences of the proposed change are far-reaching. If you are aware of a possible transaction in the foreseeable future involving a trust, that will result in capital gains or other income that is out of the ordinary, please contact your relationship director as a matter of urgency to enable us to plan properly before the event occurs.
Further developments around this matter will be covered in our newsletter in the coming months.
Source: Arnold Scholtz