Make sure you get the tax treatment of Trust right with these three basic principles.
Revealed: Three basic tax principles to avoid penalties on your Trust
#1: The tax rate of your trust depends on whether it's special or ordinary
The Practical Tax Loose Leaf Service defines a special Trust as a Trust created solely for the benefit of a person who suffers from a mental illness or serious physical disability that prevents them from earning sufficient income to maintain themselves.
It can also be a Trust created through a last will and testament for the benefit of relatives of the deceased who are alive or has been conceived on the date of death of the deceased.
Once the youngest beneficiary turns 21, the Trust is automatically reclassified as an ordinary trust from that year of assessment into the future. An ordinary Trust is any Trust that isn't a special Trust.
How are these two Trusts taxed?
Special Trusts are taxed on a sliding scale. A special Trust's income tax rate is based on a sliding scale, starting from 18% and moving to a maximum of 40%.
Only 25% of a special Trust's capital gains are included in its taxable income. It also has access to the Capital Gains Tax (CGT) primary residence exemption and the CGT annual exclusion, which are usually reserved for natural persons (any human being, with legal capacity commencing from the time of birth)
Ordinary Trusts are taxed at 40%. This means, the income tax rate of an ordinary Trust is fixed at a flat rate of 40%.
50% of its capital gains are included in its taxable income. It doesn't qualify for the primary or secondary rebates, interest and dividend exemption, the capital gains tax(CGT) primary residence exemption or the CGT annual exclusion.
#2: All Trusts must pay provisional tax
According to South African tax laws, a Trust must be registered as a provisional taxpayer, regardless of its activities. According to SARS provisional tax is paid by any person who receives income (or to whom income accrues).
'If you, as a beneficiary, obtain as an interest in a Trust asset, then the proceeds of the asset will be deemed to be its fair market value. The Trust's base cost for the Trust asset will be the value when the Trust got the asset and any additional amount invested in the asset,' says the Practical Tax Loose Leaf Service.
Well there you have it. Make sure you adhere to these principles when it comes to Trusts and you'll be sure to avoid penalties.