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Tax on Trusts is far from simple! Make sure you know these three basic tax principles to get it right

by , 18 November 2014
Contrary to popular belief, Trusts aren't exempt from tax.

With SARS, ignorance of the law is never an excuse. Your Trust must account for tax correctly. If you don't, you'll have hefty SARS penalties coming your way not to mention prosecution.

That said, the reality is tax on Trusts isn't simple.

According to experts behind the Practical Tax Loose Leaf Service, it all depends on who's got what rights and how they access the Trusts' assets and income.

So where does this leave you?

We've got you covered.

Keep reading to discover the three basic principles about tax on Trusts so you can get it right and avoid SARS' wrath.

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Three basic tax principles about Trusts

1. All Trusts have the same financial year-end and must pay provisional tax
The year of assessment for all Trusts ends on the last day of February.
In addition, South African tax laws clearly state that all Trusts must register as a provisional taxpayer regardless of their activities.
Not sure what provisional tax is?
In this article, we explain that provisional tax is a tax system that makes taxpayers estimate and pay their taxes in the form of two payments (one every six months), instead of having to pay one large sum at the end of the tax year.
For more information on provisional tax, check out the Practical Tax Loose Leaf Service.
2. The tax rate of your Trust depends on whether it's special or ordinary
Special Trust: This is a Trust put together solely for the benefit of a person who suffers from a mental illness or serious physical disability that prevents them from earning sufficient income for their own maintenance.
It can also be a Trust put together through a Last Will and Testament for the benefit of relatives of the deceased who are alive or put together on the date of death of the deceased.
Ordinary Trust: An ordinary Trust, on the other hand, is any Trust that isn't a special Trust.
Now let's look at the tax treatment of these Trusts.
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.
Ordinary trusts are taxed at 40%: 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 for secondary rebates, interest and dividend exemption, the CGT primary residence exemption or the CGT annual exclusion.
3. Your Trustee must complete and send SARS an Income Tax Return for the Trust every year
The good news is SARS has made the process of submitting your return even easier.
Last month, it introduced a new Income Tax Return for Trusts (ITR12T) so you can submit accurate returns every time.
There you have it. We hope these points will help you get the tax treatment of your Trust right and avoid penalties.
PS: Because there's so much more you need to know about Trusts and tax, check out the Practical Tax Loose Leaf Service.

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