Monday, September 22, 2014
The South African Revenue Service (SARS) has issued a draft guide, for consultation, on the taxation of "special trusts," which has been prepared to assist users in gaining a more in-depth understanding of their taxation, with particular reference to income and capital gains taxes.
In the guide, IRAS confirms that, while a single rate of tax of 40 percent for trusts was introduced with effect from the 2003 year of assessment to combat the practice of income splitting through the use of multiple trust structures, this higher rate of tax does not, however, apply to special trusts which are taxed under the same rate structure as natural persons.
The definition of special trust, which was initially introduced with effect from the 2002 year of assessment (YA), only refers to trusts created solely for the benefit of individuals who suffer from a defined mental illness or a serious physical disability. In addition, to qualify as a special trust, the beneficiary's illness or disability must incapacitate that beneficiary from earning sufficient income for his or her maintenance, or from managing their own financial affairs. These trusts are referred to in the guide as "type-A trusts."
The definition of special trust was extended, with effect from the YA 2003, to include certain trusts established by or under the will of a deceased person for the benefit of, amongst others, relatives of the deceased person when the youngest beneficiary is under the age of 21 years. These trusts are referred to in the guide as "type-B trusts."
IRAS confirms that the main importance of the distinction between a type-A trust and a type-B trust is because a type-A trust qualifies for certain relief from capital gains tax, while a type-B trust does not qualify for such relief.