CAPE TOWN: As the tax rate of beneficiaries will often be lower than that of the trust, it makes sense, from a tax point of view, to distribute some or all of the taxable income. Of course there might well be other factors in deciding what portion, if any, of a trust’s income should be distributed.
The needs, estates and tax position of each beneficiary should be considered before a decision is reached by the trustees. Of critical importance is that such distributions are only made to beneficiaries recorded in the trust deed.
It is worth remembering too that distributions to beneficiaries do not require to be made in cash, and the terms of eventual payment by the trust should be carefully considered by trustees, having regard to the current liquidity and future cash requirements of the trust to fulfil its responsibilities to all beneficiaries.
In making this decision, we advise that the new Section 7C amendment needs to be taken into consideration with regards to any interest-free or low-interest loans made to trusts. As from 1 March 2017 loans made to trusts at below the SARS prescribed interest rate will be deemed to be donations, attracting donations tax at the rate of 20%.
The donation is calculated on the difference between interest charged and interest at the SARS prescribed rate. We suggest that you contact us to discuss the possible clearing out of any loans that you might have made to any trust.
If you have made any such loans to your trust during the period 1 March 2017 to 28 February 2018, the donation arising from the application of Section 7C is deemed to be have been made on 28 February 2018. The donations tax thereon is payable by the end of March 2018.
This means that any person who lends to a trust needs to be aware of those loan balances by 28 February 2018, to calculate donations tax repayable in March 2018. This will no doubt require a more pro-active and timeous book-keeping process.