Do You Have Assets In A Trust? Listen Up!

A new ruling by the South African Revenue Service now requires that donations to trusts be taxed if the lender does not charge interest.

- Marcia Klein

Changes to the Income Tax Act have important consequences for anyone who has transferred assets into trusts. Trustees and creditors of trusts need to be aware that from 1 March, anyone who has transferred assets to a trust without being paid for it may have to start charging the trust interest, or be liable for donations tax.

When someone transfers assets to a trust without receiving fair payment, they can either donate the assets and pay donations tax of 20% of the market value of the assets, or sell the assets to the trust on loan account at an interest rate the trust would have to pay any other non-connected lender, like a bank.

It has become common practice for people to sell assets to a trust rather than donate them as this meant they were not liable for donations tax, which is 20% of the value donated above R100 000 a year. Generally, no interest was charged either because the trust may not have the liquidity to repay or because whoever transferred the asset did not want to pay tax on the interest.

“Typically, the scenario would have allowed you to ‘write off’ the loan and avoid donations tax through the annual tax-exemption on trust assets of up to R100 000,” says David Thomson, Sanlam Fiduciary Services’ legal adviser.