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WARNING: If you elect a new trustee and transfer assets without paying transfer duty, SARS will penalise you

by , 12 December 2014
SARS is very watchful when it comes to Trusts trying to get away without paying tax. There are many methods these Trusts use to do this.

One that SARS is particularly wary of is when Trusts elects new trustees and transfer assets to them without paying transfer duty fees.

If SARS catches you doing this, it will hit you with a crippling 200% penalty.

This happened to the 'EF Trust'. Here's what happen when SARS caught this Trust in the act...

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Here's what happened when SARS caught the EF Trust transferring assets to a new trustee without paying transfer duty fees

The EF Trust entered into a series of transactions where it obtained a loan, purchased immovable property and then replaced all of its trustees, income and capital beneficiaries with new ones.
The Trust claimed that the replacement of its trustees, income and capital beneficiaries didn't constitute a transaction for transfer duty purposes, so it didn't have to pay transfer duty fees.
SARS argued that a transfer of property, i.e. a transaction, took place, so the Trust did owe transfer duty fees.
The basis of this argument was that the old trustees, who owned the trust property originally, lost all rights to that property and the new trustees acquired those rights in the transaction.
In effect, SARS argued that the previous Trust no longer existed and a new Trust took its place. As a result, the Trust entered into a transaction that triggered transfer duty fees.
Here's what the Court had to say about SARS' argument
The Court agreed with SARS: The transaction did result in the creation of a new Trust. There was a transfer of property as part of this transaction and it was without doubt subject to transfer duty fees (In this case, the fees came to R190 000, 10% of the value of the immovable property.)
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Here's what you can learn from this case

If a transaction seems too simple, it usually is! It's essential to understand the true nature of every transaction you enter into. Since the name you give it may not correctly describe the transaction, be sure to understand what type of transaction you're entering into and check it's the one you actually want to follow through. 
Even an innocent misunderstanding can lead to serious penalties if you enter into a transaction without doing it correctly (i.e. without paying transfer duty fees in this case).
To check the consequences of a transaction before you enter into it, give SARS a call and simply ask. This will save you from costly legal battles later. 
And if you want to transfer property from old trustees to new ones, remember you to pay transfer duty fees. Here are the amounts SARS uses to determine how much you must pay in these fees:
R0 – R600 000 = 0%.
R600 000 – R1 million = 3% on the value above R600 000, but not exceeding R1 million.
R1 million – R1 500 000= R12 000 plus 5% on the value above R1 million, but not exceeding R1 500 000.
R1 500 000 and above = R37 000 plus 8% on the value above R1 500 000.
Now that you know, ensure you pay the right amount in transfer duty fees if you transfer property to new trustees. 
For more case studies like this, check out the Practical Tax Loose Leaf Service.

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