Most Read Contributor in South Africa, December 2016
The Davis Tax Committee's ("DTC")
first interim report was released in July 2015 (the
"First Report") and made various
significant recommendations to the Minister of Finance regarding
(among other topics) the taxation of trusts in South Africa.
Subsequent to the release of the First Report, various
stakeholders and members of the public submitted comments to
National Treasury to express their concerns in relation to the
far-reaching consequences that may arise, particularly in relation
to the taxation of trusts, should the recommendations of the First
Report be legislated.
On 24 August 2016, the DTC released its second interim report on
estate duty (the "Second Report"), which
submits revised proposals to the Minister of Finance as relates to,
inter alia, the taxation of trusts.
Two of the most notable proposals contained in the First Report
the recommendation that the long
established "conduit pipe" principle applicable to the
taxation of trusts be abolished (in essence, such proposal
recommended the removal of legislative provisions in terms of which
trust income can be taxed in the hands of beneficiaries or a donor
at lower marginal rates, as opposed to the flat higher rate of tax
in a trust)
the First Report further stated as
"There would be numerous
complexities associated with implementing a form of transfer
pricing adjustment to deem a return on interest-free loans between
[South African] registered trusts and [South African] taxpayers.
The DTC concurs with the recommendations of the Katz Commission
that this be avoided."
The Draft Taxations Laws Amendment Bill, released on 8 July
2016, proposes to insert section 7C into the Income Tax Act, which
section appears to be a mechanism to encourage loans to trusts to
carry at least the official rate of interest in these or
If enacted, section 7C will apply where any natural person or
company that is a connected person in relation to such a natural
person makes or provides any loan, advance or credit to a trust in
circumstances where such natural person or company (or any
associated connected person) is a connected person in relation to
The following consequences will come into play in relation to
if the loan does not bear interest or
bears interest at a rate lower than the official rate of interest,
the official rate of interest must be taken into consideration in
determining the amount of interest to be included in the income of
the natural person
the income tax attributable to such
inclusion will be recoverable from the trust, and the failure to
recover such amount from the trust within a period of three years
will give rise to the natural person being deemed to have donated
such amount to the trust – giving rise to concomitant
donations tax implications
should such a loan be reduced or
written off, the annual donations tax exemption available to
natural persons (currently ZAR100 000) will not be available
no deduction, loss or allowance may
be claimed in respect of any disposal of the loan claim or the
failure to claim repayment in respect thereof
The Second Report makes the following revised proposals:
the "conduit pipe"
principle should be retained only in relation to vested trusts (ie
where a trust deed confers upon its beneficiaries an indisputable
and irrevocable vested right to both capital and income of a
principle"/fiscal transparency should be abolished for onshore
the flat rate of taxation of trusts
(currently 41%) should be retained and be subject to adjustments in
line with changes to the maximum personal income tax rate
estate duty provisions are to be
expanded upon so that the "deemed control" of a trust by
a person through a low-interest or interest-free loan account (in
circumstances where such person and trust are connected persons in
relation to each other) give rise to estate duty implications for
trust arrangements should be examined
by the South African Revenue Service
("SARS") on registration of the trust
and upon transfer of assets into trusts so as to, inter
alia, reduce aggressive tax planning
donors and beneficiaries of all
vested trusts should be subject to stricter disclosure requirements
and enforcement measures
SARS should comprehensively examine
foreign trust arrangements and should establish a separate
investigations unit to attend to same. In addition, where
disclosure deficiencies are identified, penalty provisions should
be rigidly applied
It is unclear as to the interaction of the proposed section 7C
and the proposed extension of the "deemed control"
The Standing Committee on Finance is scheduled to hear
submissions regarding various tax proposals including the proposed
section 7C in September 2016.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The CRS require the trustees to identify the settlor, beneficiaries and other natural persons exercising ultimate effective control and report the necessary financial information to the relevant foreign revenue authority.
On the 27th of October, 2015, the Tax Appeal Tribunal, Lagos Zone delivered a judgment in favour of the Shell Petroleum Development Company of Nigeria Limited in the above stated case.
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