Are trusts still as applicable as they once were?

Discussions on the Davis Tax Committee Report and its recommendations in terms of trusts.

By: Andrew Duvenage – NFB Financial Services Group

Earlier in the year, the Davis Tax Committee (DTC) released its first report in respect of estate duty in terms of the continued role and relevance of estate duty in South Africa.

One of the aspects the report looked at was the way in which trusts are to be taxed. In this regard they proposed the removal of the ‘attribution principles’ (section 7 and 25B of the Income Tax Act), which would effectively remove the conduit pipe principle, in that all income and capital gains received by a trust would be taxed in the hands of a trust (at higher rates) and not passed through to beneficiaries with lower rates of taxation.

The report states that the attribution rules were originally intended as an anti-avoidance measure to prevent income splitting opportunities (bearing in mind that back in 1972 the maximum rate for individuals was 78%), but today they no longer serve this purpose. In fact the opposite is true – they now represent a concession to high net worth individuals. At best, income will be taxed at the same rate of 41% but it could be taxed at anything from 0% to 41%, depending on the level of taxable income of the donor.

The removal of the section 7 and 25B (as applicable to RSA residents) would result in income being taxed in the hands of a trust at 41% from R1 (same marginal tax rate as an individual, although an individual is taxed on a progressive scale) and capital gains being taxed at a rate of 27.3% (vs. 13.65% in the hands of an individual).

It would effectively remove the income splitting opportunity to spread income amongst beneficiaries with lower tax rates and in certain cases with the added benefit of an interest exemption and annual capital gains tax exclusion.

Other DTC recommendations in relation to trusts:

  • Flat rate to be maintained for Trusts at existing levels i.e. 41%
  • The deeming provisions of section 7 and 25B to be retained insofar as they apply to non-resident trust arrangements.
  • Trusts to be taxed as separate taxpayers
  • Relief to be available for special trusts (definition to be revisited).
  • Status quo to remain in respect of interest free loans.


Whilst the use of trusts remain a topical issue, it is useful to recap their current advantages and to consider whether they remain viable post these reforms.

Advantages of trusts

  • Estate Freezing

This is the most common perception in considering whether to form a trust or not. Assets which are expected to grow substantially in value are either sold to a trust (for the benefit of the seller and his family) or acquired by a trust in the first instance. Any increase in the value of assets is excluded from such person’s estate for estate duty purposes as the growth in the value of the assets takes place in the trust.


There are however many other reasons and advantages in forming a trust:

  • Protection against creditors where a person may be exposed to business risks and creditors’ claims.
  • Estate skipping mechanism whereby an inheritance is passed to a trust on behalf of a beneficiary instead of directly to the beneficiary. This has the benefit of avoiding any further estate duty on such assets, but also acts as an effective planning mechanism for future generations, protection of an heir from the consequences of a marriage break-up, business risks and creditors’ claims.
  • It allows for efficient succession where assets are held in trust, there is no impact (in the form of estate duty, delays in administering an estate etc.) on the death of the original donor of the asset or on the death of any one of the beneficiaries of the trust. The asset continues unimpeded for the use and enjoyment by the remaining beneficiaries.
  • A trust can be used to achieve the same benefits as a usufruct without necessarily creating any estate duty implications on the death of the person enjoying the benefit (i.e. the usufructuary), although the benefit of the Section 4(q) deduction may potentially be lost, depending on how the benefits in the trust are structured. One of the main advantages in adopting this particular route is that the value of the underlying asset will be transferred at market value and not the bare dominium value (which is usually a fraction of the market value), resulting in a more realistic (and current) base cost. This will have a more favourable outcome for CGT purposes when the asset is ultimately realised.
  • Trusts can be used to hold assets such as farming property which are incapable of sub-division in terms of the Agricultural Land Act, receive lump sums from Retirement Funds for the benefit of minor beneficiaries, allocation of income amongst beneficiaries, preserving family assets over time, looking after the founder’s family after his death, maintaining a spouse or child after a divorce.


It is important to note that in order to achieve the above benefits, the founder of a trust has to relinquish ownership and control of his assets. If this is not done properly then Section 3(3)(d) of the Estate Duty Act may be applied which deems property of the deceased to include any property which he was competent to dispose of for his own benefit and such property will be included in his estate at the market value thereof at date of death (notwithstanding that it may be housed within a trust).

The issue of control or lack thereof over assets to be placed in a trust has often been the prime dilemma faced by potential founders of trusts.

Despite the proposed changes referred to above, a trust nevertheless remains a viable option in the pursuit of a commercial benefit, provided the sole reason is not purely driven by estate duty or income tax benefits.

Philip Shapiro, Financial Director and Head of the Estates Division for NFB Financial Services Group.

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