A Trust in the narrow sense refers to the legal institution where an intermediate person/s, the trustee/s, holds property as owner thereof in his /her capacity as trustee in accordance with the expressed wishes of another person, the settlor or founder, not for his/her personal benefit but for the benefit of named or ascertainable beneficiaries or for an impersonal object.
In other words if you form a Trust you are known as the Founder/Settlor of the Trust, and you will appoint trustees in terms of the trust deed to manage your affairs for the benefit of the beneficiaries that you also name in terms of the trust deed.
There are two types of Trusts. The inter vivos or living trust is an entity formed by a person, the founder, who formalizes a written Trust Deed in terms of which he /she agrees to transfer certain assets during his/her lifetime to one or more trustees who administer the assets in terms of the Trust Deed. The second type of trust is known as a testamentary trust which is created in terms of the will of a deceased person. The trust only comes into existence on the death of the founder and then the assets of the founder are administered by the trustees in terms of the Trust Deed after the death of the founder.
- Registration: At the Master of the High Court, who issues Letters of Authority in favour of the trustees. There must be at least 1 independent trustee.
- Established by a Deed of Trust
- Parties to Deed of Trust: Founder/Settlor, Trustees, Beneficiaries
- Administered by trustees, with powers as specified in the Deed of Trust
- No audit requirements, although it is essential to administer trust properly, to avoid courts "looking through" the Trust and deeming it to be the founder's property
- Pays transfer duty at the same rate as natural persons
Capital gains tax:
Inclusion rate: 80% Effective rate: 32.8%
If the capital gain is awarded to the beneficiary, he/she will pay CGT at his/ her effective rate. Proper administration of the trust is essential.
- Trusts do not die, therefore no estate duty is payable. Any shares in a company or members interest in a close corporation owned in the Trust, or any other assets (if owned directly) are owned by the Trust and are not assets in the estate of the individual and therefore do not increase the estate duty payable by the individual on death. The trust is a separate legal entity and the trust assets cannot be attached by the creditors of the beneficiaries.
Other Tax Considerations:
No transfer duty is payable if the seller is registered for VAT (and the property is part of the operations for which the seller is registered), but VAT at the rate of 14% is payable. If the contract does not specify that the VAT is to be paid over and above the purchase price, then it is deemed to be included in the purchase price.
If the property is sold as a rental enterprise or as a going concern e.g. a guesthouse, the deed of sale must contain certain specific provisions and may be zero rated for VAT. This means that no transfer duty or VAT is payable.
If the purchaser registers for VAT, then the Vat (or the transfer duty) can be claimed back as an input credit in certain defined circumstances.
If a property investor does not acquire a property with the intention of holding it for an indefinite period or for rental purposes, but with the intention of selling it to make a profit, then SARS may well regard the investor as a dealer and levy income tax at the investor's tax rate on the profit. Capital gains tax will not apply if income tax is payable.