Monthly Archives: February 2016

Using a Trust for Estate Duty purposes

A3Trusts are popular mechanisms through which individuals often structure their affairs to ensure efficient administration of their estates when they should one day die. One of the many advantages of using a trust is of course that it continues to ‘live on’ despite the fact that any one individual may have died. This in itself is a great benefit, especially when seen against the scenario where a person’s dependents are left in a state of financial limbo, and quite often financially distressed, but in anticipation of an estate being dealt with and divided in accordance with the law of succession by the appointed executor. This process can often take months, if not years.

Another factor rendering trusts so popular for estate planning purposes, is that it can also potentially be utilised as an effective estate duty planning tool. Bearing in mind that the first R3.5 million of one’s estate is exempt from estate duty (levied at 20%), an individual may be well advised to sell his/her estate to a trust when it is still relatively small.

For example, if Mr A has an estate of R1 million and he were to sell this on loan account to a trust of which his dependents and family members (and even he himself) are the beneficiaries, he will still own an asset of R1 million (being the loan claim) in his own hands in 20 years’ time when he dies. However, his erstwhile estate, consisting of property and share investments, are by now worth R5 million, albeit owned by the trust. Besides therefore that Mr A’s family is able to still access the investments through the trustees of the trust being mandated and obliged to care for their financial needs, Mr A has also saved on estate duty of R300,000 (being 20% of the amount in excess of R3.5 million).

The law of trusts is not open to abuse though, and it is important that appointed trustees of a trust act in the interests of the beneficiaries, as well as exhibit a degree of independence. Trustees who do not act independently and in the interest of the trust beneficiaries (and who are merely ‘puppets’ of an individual) will lead thereto that the trust in itself be disregarded and seen as a sham. The trust must therefore operate as a distinctly separate estate.

For estate planning purposes, as well as the proper administration of a trust (which can be fraught of potential pitfalls) it is best to seek the help of an advisor before embarking on any such exercise. One should further be mindful of the deliberations of the Davis Tax Committee, which is considering sweeping changes to the use of the trust instrument in specifically the estate duty context.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

The general Anti-Avoidance rules

A2The Income Tax Act, 58 of 1962 (‘Income Tax Act’) contains various specific anti-avoidance rules aimed at preventing the abuse of certain specific sections in the Income Tax Act. However, over and above these specific anti-abuse provisions, the general anti-avoidance rules (‘the GAAR’) would also find application to cover further potential and unforeseen loopholes, or abuse of beneficial tax regimes, which exist nonetheless and are exploited by taxpayers.

The GAAR is contained in sections 80A to 80L of the Income Tax Act. Its provisions supersede any other contained in the Income Tax Act. Broadly speaking, the GAAR consists of 4 elements, all of which must be present in order for SARS to be able to successfully invoke the GAAR against a taxpayer:

  1. an arrangement (which includes any transaction, scheme, agreement or understanding) must have been entered into,
  2. with the sole or main purpose to obtain,
  3. a tax benefit (defined as including any avoidance, postponement or reduction of any liability for tax), and
  4. this arrangement must exhibit signs of ‘abnormality’.

‘Abnormality’ is to be determined, in terms of section 80B, depending on the context within which the arrangement or transaction in question has been entered into. For example, a transaction entered into in a business context would be regarded as being abnormal if it lacks commercial substance (dealt with in detail in section 80C), whilst in a context outside of business, a transaction would be considered ‘abnormal’ if it is entered into based on terms not normally employed for bona fide purposes.

It is significant that the onus to prove that the GAAR should not apply generally rests on the taxpayer. In this regard, section 80G makes it quite clear that a taxpayer is presumed to have entered into a transaction with the sole or main purpose to obtain a tax benefit, until the taxpayer is able to prove otherwise.

The GAAR can be applied to a single transaction, a multi-stepped scheme viewed holistically, or it can even subject a single step (which may have been inserted for only tax purposes only) to scrutiny.

Once it has been determined that SARS may invoke the GAAR in relation to any such ‘impermissible avoidance arrangements’, SARS is afforded wide-ranging powers including:

l disregarding, combining, or recharacterising any steps in or parts of the impermissible avoidance arrangement;

l deeming persons who are connected persons in relation to each other to be one and the same person for purposes of determining the tax treatment of any amount;

l reallocating any gross income, receipt or accrual of a capital nature, expenditure or rebate amongst the parties;

l recharacterising any gross income, receipt or accrual of a capital nature or expenditure; or

l treating the impermissible avoidance arrangement as if it had not been entered into or carried out, or in such other manner as in the circumstances of the case SARS deems appropriate for the prevention or diminution of the relevant tax benefit.

It may seem at first as though the GAAR requirements are extremely onerous and weighted in SARS’ favour. If one remembers though that all 4 the elements discussed above must be present before SARS can invoke the GAAR, some balance is restored. When subject to a GAAR dispute with SARS therefore, it is advisable to focus on those elements which the taxpayer is able to defend. Proving the absence of merely one of the 4 prerequisite elements destroys SARS’ attack.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

Are you a South African Tax resident individual?

A1The question of tax residence for individuals has always been relevant in South Africa. It appears as though we find ourselves in a country which has always been a popular destination to which people from across the globe flock to set up businesses, but also a country from which people often travel for long-term stints overseas, or sometimes even permanent relocation.

The tax residence of individuals are important for people with ties to South Africa. South Africa charges tax resident individuals with income tax on their world-wide income, and non-tax resident individuals on their South African source income. The taxation of income from sources other than South Africa is therefore at stake here.

‘Tax residence’ is often confused with residence as would be applied for immigration purposes. It is very important to understand that tax residence is not determined by the passport that you hold. Rather, very different tests are applied.

In terms of the Income Tax Act, 58 of 1962, a person can be resident by virtue of being ‘ordinarily resident’ in South Africa, or by virtue of being physically present in the country for a predetermined amount of days.

‘Ordinarily resident’ is an undefined term in the Income Tax Act, but it refers to where a person’s ‘real’ home would be. Our courts have in the past explained that this would be ‘… the country to which [an individual] would naturally and as a matter of course return from his [or her] wanderings…’. (Cohen v CIR [1946] 13 SATC 362). Therefore, irrespective of whether one spends years in another country (and even acquire a passport there as a result), if one’s family and friends remain in South Africa, and the intention was always to return to South Africa at some stage and to settle here, it is quite possible that tax residence would have remained in South Africa throughout by virtue of the ‘ordinarily resident’ test.

The ‘physical presence test’ determines that, despite not being ‘ordinarily resident’ in South Africa, a person may still be considered South African tax resident if he/she spends enough time here. A person is considered to be a South African tax resident if he/she spends at least 91 days a year in the country, as well as 91 days in aggregate in each of the preceding 5 tax years. However, throughout this 5 year period, the person must have spent at least 915 days in South Africa in total. (A person would cease to meet the physical presence test if, after becoming resident, he/she spends 330 continuous days outside of South Africa.)

From the above, one would realise that it is quite possible for an individual to be considered resident for tax purposes in more than one country. This may potentially give rise to double taxation. South Africa has concluded numerous ‘double tax agreements’ with various countries across the world to cater for exactly this occurrence, and these treaties would include further criteria to determine in which of the two countries a person would be regarded as being tax resident to ensure that double taxation does not arise. This however, even more so than the domestic residence test explained above, may become quite involved.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE).