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Will Sars penalise my kids for investments I made in their names?

It is unlikely, unless the unit trust investments exceeded certain thresholds – but going forward, it is important that they understand what types of incomes the different asset classes attract.

My mother gave me birthday money to invest in unit trusts for her grandchildren (my children) over the years. The unit trusts are in their personal names, the interest/dividends from these unit trusts were reflected in my tax returns until 2016. They are not tax registered and will next year start working. Will they be penalised tax-wise in this regard? Their income from these unit trusts is below the tax thresholds (dividends, interest and so on). Will Sars be asking questions?

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Thank you for your question. For the purposes of this response, we have assumed that your children will be earning taxable income from next year and will hold the unit trust funds in their personal names.

The South African Revenue Service (Sars) recently announced that if all the criteria below apply to an individual, then there is no need to submit a tax return:

  • Your total employment income of the year is below R500 000;
  • You only received employment income from one employer;
  • You do not have a car allowance/company car/travel allowance or other income such as rental or interest income; and
  • You are not claiming tax related deductions/rebates such as medical expenses or retirement annuity contributions.

If you are still unsure whether or not a return needs to be completed, there is a further set of criteria that goes into further detail.

The list below is specific to what would apply to an individual owning a unit trust investment.

A tax return needs to be completed if:

  • You earned interest exceeding the annual exempt amount of R23 800 for someone below the age of 65;
  • You hold any funds in a foreign currency or assets outside South Africa that have a combined total value of R250 000 during the tax year; and/or
  • You have a capital gain or loss realised (switching of funds or withdrawal) during the tax year exceeding R40 000.

As such, when looking at the above criteria, if none of your children’s unit trust investments exceeded any thresholds as mentioned in your question, then they will not be liable for tax. Even though the interest/dividends were previously reflected on your tax returns, and assuming that since 2016 no tax returns were submitted in respect of your children, the fact remains that no tax was liable and there were no criteria that obliged them to submit a tax return and, as a result, no penalties would be applicable to your children.

Going forward, it is important to understand what types of incomes the different asset classes attract, and these are listed in the table below followed by an explanation of how each will be taxed.

Asset class Interest income Dividend income Property income
Equity No Yes No
Property No No Yes
Bonds Yes No No
Cash Yes No No

Interest income

This interest income is subject to income tax and is taxed at your marginal tax rate. Individual taxpayers enjoy an annual exemption on all South African interest income they earn, set by Sars every year. This exemption is R23 800 for individuals under 65 years old and R34 500 for individuals 65 years and older.

Dividend income

For equities (excluding listed property companies), you will incur dividend-withholding tax (DWT) on the dividend income they pay out. DWT of 20% is withheld from your dividends before they are paid out or reinvested.

Property income

Reits, or real estate investment trusts, are taxed differently from other listed companies. They do not pay corporate income tax, and their investors do not incur DWT on the distributions they pay out. Instead, investors pay income tax on the distributions they receive from these Reits at their marginal income tax rate.

What about capital gains tax (CGT)?

CGT is another tax associated with investing in unit trusts. A capital gains event is triggered only when you decide to sell or switch (part or all of) your investments (such as units in a unit trust). If the price of the units has risen since you invested, this increase in value is known as a capital gain (or a capital loss if the value has declined). Currently, only an amount of 40% of this capital gain (not the total gain) is included in your annual income; this makes the maximum CGT rate for individuals paying the maximum 45% marginal tax rate 18%. Individual taxpayers enjoy an annual capital gain exclusion of R40 000.

Do you have any questions you would like answered by registered financial planners?

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COMMENTS   9

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The SARS hyena will look everywhere for a R5 coin or maybe even a old tin in the garage full of 5 cents or 10 cents,

but

will not look in Dubai and Pakistan where billions of South African stolen money resides in know banks and is spent on the high life.

There is even a mansion that was not declared.

For REITS, dividends are taxed as income tax depending on the individuals marginal rate. My question is if my minor son has an EE account, would the tax declaration be under his name or mine? SARS determines REITS as income tax – I am just thinking that it would be more tax viable to have it under his name at a lower marginal rate.

Here is a good simple summary explanation courtesy of Allan Gray website:

“If you donate money to your children or transfer an investment to them, the income is taxed in your hands while your child is a minor. This also applies to income received by minor stepchildren and adopted children. It is not the donated amount itself that must be included in your income (e.g. the value of the unit trusts), but the income resulting from the donation (e.g. dividends and interest generated). If you later sell the unit trusts at a capital gain, this amount must also be included in your capital gains tax calculation.

In addition, you will be liable for donations tax at a rate of 20% of the donated amount which must be paid within three months of making the donation. There is an annual donations tax exemption of R100 000. This exemption is per person per year and not per donation.

To summarise – if you invest some of your own money in your minor children’s names you must include the income and capital gains from their investments in your own tax return.”

Great comment! (And you picked up on possible Donations Tax, that I wanted to add in for consideration, which you did already).

It all depends how big is the birthday present 😉

It usually goes like this:
SARS audits the child and question were he/she got (say e.g. R150K) from? (SARS assumes it could be undeclared salaried income).
The clever parent jumps in to helps the child to respond to SARS “It was not taxable income from salary, but a gift from my mother!!”

SARS asks: “Who is your mommy?” 🙂

Two weeks down the line “Mommy” receives an email notification from SARS which includes the words “Additional Assessment ITA34 has been issued…”

The next week a concerned mother phones her tax practitioner. With a box of tissues, a solution is offered…. 😉 Who said it was (all) a gift?

So what you’re saying Michael is that it is better to pay your child income or have the funds donated by your parent (under 100k exemption) so that they should register for tax although being a minor. Their marginal tax rate will be less in order to collect income from REITs(marginal tax rate charged), divs(no difference @ std 20%) and later cgt. Only thing to consider is if you want your kid rooted in RSA as a taxed individual

I believe that the best tax efficient savings mechanism for children is currently the tax free savings account. It is exempt from tax (if you stick to the rules) and is independent from the parent(s) tax affairs. The parent (donator) just needs to be aware of the R100k donations tax exemption limit per year.

The only consideration here is that you use your child’s tax free savings lifetime benefit (R500k) which they may want to use later when they are taxpayers in their own right

Correct, however the R500k is likely to be revised over time and if you’re investing for a child when they’re very young, the benefit of compounding returns over a large amount of time becomes significant. The cap does not cover investment returns only the capital invested. I suppose essentially you need to decide what would benefit the child more, having an investment to start them off on independence or being able to use the benefit to save for later in life.

Excellent -summary, concise with added info, thanks, Devon Card.

Had started an investment in Unit trusts with Nedbank at a very early age for my Daughters -Uni education, which grew rather significantly over the years and helped when needed. Then after 2010 the balance reversed and has languished at lower returns – she is just keeping it in hope ( like we all are ) that some real returns will come back and then she can add to a home deposit -now we know she is still legally inside Tax req .

Also the added comments re donations tax appreciated, always thought it was R100K Per child – not per donator

End of comments.

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