Trusts Flashcards
(42 cards)
What is a trust?
A trust is an arrangement through which control and ownership in property is by virtue of a trust deed made over or bequeathed to another person or persons (the trustees) for the benefit of the beneficiaries.
Who is the donor is a trust?
The person who forms the trust by making over or bequeathing property to trustees.
Who is the trustee in a trust?
The person who has bare ownership of the trust assets and who administers trust assets on behalf of the beneficiaries.
Who is a beneficiary of a trust?
A person who has certain rights in terms of a trust deed in respect of the trust property.
What is a trust deed?
The written document in terms of which a trust is established.
What are the two types of trusts?
A testamentary trust: set up in terms of a will of a person which comes into effect after his or her death.
An inter vivos trust: set up during the lifetime of a person.
What is a inter vivos trust?
Special type of contract where the creator of the trust(donor or founder) enters into a contract with trustees, where the donor donates or transfers assets to the trustee and requires the trustee to administer the assets on behalf of a group of beneficiaries which the donor specified.
Usually a trust is a discretionary trust, what does it mean?
The beneficiaries are not entitled to any income or capital distribution unless the trustees in their discretion decide to make some distribution to the beneficiaries. The beneficiaries’ rights are therefore contingent. Once a distribution is made the income vests (belong) in the beneficiaries.
What are the steps to calculate tax for trust?
- Compile a table
- Calculate the taxable income of the donors
- Calculate the taxable income of the beneficiaries
- Calculate the taxable income of the trust
What does step1 compile a table entail?
- Compile a table that summarizes the trust’s income for the current year
- All distributions and vested rights are now allocated proportionally
- Write next to the name of the beneficiaries, his status as a resident and indicate whether he is a minor
- Any amount received by reason of an annuity is written obliquely so that one can remember that the annuity no longer qualifies for the general dividend exemption in terms of section 10(1)(k) but only section 10(1)(i)(xv)
- The name of the person responsible for the income S a consequence of a donation, settlement or other disposition, must be clearly indicated on the table
- Round off amounts to the nearest rand
- One must always refer to the table every time an amount is used as income in a person’s tax calculation, and the relevant amount must be crossed out in the table.
How do you complete step 2 calculation of the taxable income of the donors?
- Account for all amounts to which the donors have a vested right
- Examine the amounts actually received by them. Establish whether or not they are entitled to trustee remuneration and interest on a loan
- Test for the application of section 7(2) to 7(8) one by one
- Compare the amount included in terms of section 7(2) to 7(8) with the benefit given, and ensure that no limitation is necessary
- Ensure that expenditure that had to be allocated has in fact been allocated and that the losses are correctly dealt with
- If income has been paid out from capital of the previous year, it is not taxable, but test for the possible application of section 25B(2A) when it is paid from a non resident trust
- When spouses are marries in community of property, divide the applicable passive income equally between the spouses
- Give the donor the applicable interest and dividend exemptions
How do you calculate the taxable income of the beneficiaries?
- The beneficiaries should now only be taxable on all amounts that appear next to their names on the table that have not already been crossed out
- Test whether there are any amounts to which they have vested right and which have not already been distributed
- Ensure there is no residue of any amount limited by step 2.4 that must still be included in the taxable income of the beneficiaries
- Ensure that expenditure that should have been allocated has been allocated and that losses have been correctly dealt with
- If income from capital of the previous year was distributed, it is not taxable, but test for the possible application of section 25B(2A) if it is received from a non resident trust
- Give the beneficiaries the applicable interest and dividend exemptions
- When spouses are married in community of property, distribute the passive income equally between the spouses
How to complete step 4 calculation of taxable income of the trust?
- The trust will be taxable on everything that has not already been crossed out on the table.
- The trust mat be done first or last, because with the assistance of the rules below, it is easier to identify on what amount the trust is liable to pay tax.
- A trust mat be taxed maximally:
- on the undistributed income
- if the donor is dead
- the income was not derived as a consequence of a donation, etc
- where no one has a vested right to the income
- on the undistributed income
How is a inter vivos trust taxed?
An inter vivos trust is taxed subject to the provisions of section 25B and section 7 of the Income Tax Act. Founder could be liable until death then trust and beneficiaries are liable.
How is a testamentary trust taxed?
A testamentary trust us traces on the income it retains and its beneficiaries are taxed on the income distribution. Either the trust or beneficiaries are liable.
What does s25B(1) provide for amounts received by or accrued to or in favor of any person in his or her capacity as a trustee of a trust?
Any amount that has been derived for the immediate or future benefit of an ascertained beneficiary who has vested right to such amount during such year be deemed to be an amount which has accrued to the beneficiary otherwise be deemed to be an amount which has accrued to the trust.
What does s25B(2) state in terms of acquired right of the beneficiary in consequences of the exercise by trustee?
Such amount is deemed to be derived for the benefit of the beneficiary
What is s25B(2A) provide for accumulated income of a foreign trust distributed to SA resident who was a beneficiary during the year?
Accumulated income shall be included in the income of SA resident if it has not already been subject to tax in SA
What does s25B(3) provide for the deduction or allowance relating to the taxable income accrued to beneficiary or the trust?
The amount is deemed to be a deduction which is permitted in the hand of the person who is deemed to have derived the amount to the extent to which the amount of income is deemed to accrued to the beneficiary or to the trust fund
What does s25B(4) provide for limitation for deduction or allowances relating to income accrued to beneficiary or the trust?
Any deduction or allowance shall be limited to the income accruing to the beneficiary from that trust in the year of assessment
What does section 25B(5) provide for excess expenditure over income?
The excess expenditure over income shall be deducted by the trust in that year but limited to the taxable income of the trust before the deduction of such expenditure (no loss). Where the trust is not subject to tax in SA the excess is carried forward and treated as deduction or allowance which the beneficiary may claim in the next year from the amount he or she gets from the trust.
What does s25B(6) provide when the trust cannot absorb the full deduction of the expenditure incurred?
The excess may be granted as deduction or allowance to the beneficiary in the next year of assessment subject to the same limitation as s25B(4)
What does it mean when the Act says section 25B is made subject to section 7?
Where section 7 applies, it overrides the provision of s25B
What is the purpose of section 7?
Anti-avoidance provision aimed at taxing in the hands of the donor, any income which has resulted from a donation or similar disposition.