Jun 24, 2024 | Article
Jun 1, 2024
MANY trustees are advised to distribute all trust income and capital gains to beneficiaries to escape the high tax rates in trusts. Even though a trust carries the highest income tax rate (a flat rate of 45%) and capital gains tax rate (a flat rate of 36%), when trust distributions are considered, cognisance is not taken of the ‘knock-on’ effect of potential further taxes that it may trigger.
Section 7C Donations Tax (actually a ‘prepayment’ of Estate Duty)
One of the major changes, to date, in trust tax law – in terms of combating the postponement or avoidance of Estate Duty – was the introduction of Section 7C of the Income Tax Act. This section taxes loans with interest below the variable official rate of interest (repo rate plus one percent – currently 9.25%) as a ‘deemed donation’. Donations Tax is payable on the interest that should have been charged on the loan.
This is taxed in the hands of the funder – the tax is 20% of the amount of the ‘donation’ if the aggregate of that amount and all other donations during a person’s lifetime (on or after March 1, 2018), excluding all exempt donations during the same period, is less than or equal to R30 million, and 25% of the amount of the ‘donation’ if the aggregate of that amount and all previous donations during a person’s lifetime (on or after March 1, 2018), excluding all exempt donations during the same period, exceeds R30m.
The rationale is that Donations Tax and Estate Duty are both charged on a gratuitous disposition (during your life and at death) at the same rates. The issue with the application of Donations Tax and Estate Duty is that no apportionment is allowed between the two tax brackets (20% or 25% explained above). Therefore, if the aggregate donations/estate is pushed above the R30m threshold, the entire donation/estate will be taxed at 25%, and no portion will be taxed at 20%.
The SA Revenue Service (Sars), through this provision, attacks the age-old method, whereby people transfer their assets to ‘their’ trusts on interest-free loan accounts, which never got repaid. The effect of this arrangement was that the person’s estate got ‘pegged’, and all the growth happened in the trust. No Estate Duty would therefore be paid on the growth of the asset upon a person’s death.
Section 7C now ensures that a person pays tax during their life to make up for this ‘loss’ to the fiscus by assuming a growth rate on trust assets. For example, if you sold a building to the trust for R3m on an interest-free loan account, you would pay R35 500 tax (R3m x 9.25% (current official rate of interest) – R100 000 (the annual Donations Tax exemption applicable to each South African resident individual)) x 20% (Donations Tax; if cumulative donations did not exceed R30m) annually, subject to changes in the variable official rate of interest and the cumulative amount of donations after March 1, 2018.
Distributions
A trust has unique tax treatment in that others may pay tax on income and capital gains generated in the trust rather than the trust itself. For example, the ‘Conduit Principle’ allows trustees to shift the tax burden from a trust to its beneficiaries, thereby paying tax at the individual’s marginal tax rate. In many cases, this may be lower than the trust’s tax rates listed above.
Therefore, one can legally use this mechanism as part of one’s tax planning, and achieve better tax efficiency. One can also apply the ‘income splitting’ (and capital gain splitting) principle to reduce the effective tax rate on income or capital gains generated in a trust, by distributing income and capital gains to multiple beneficiaries who pay tax at low rates.
This in many instances is the sole reason for trustees to move all the net income and capital gains generated in the trust during a year to beneficiaries. This is often done in such an ‘automatic’ fashion (just to save tax) that the compulsory application of the ‘attribution rules’ of the Income Tax Act, whereby all or some of the trust income and capital gains are to be attributed to the donor or funder for them to pay tax on income and capital gains generated as a result of their donation or soft funding, are overlooked.
Given Sars’ renewed focus on the ‘attribution’ rules, such behaviour may trigger penalties and interest on the incorrect treatment of trust income and capital gains. As a result of the introduction of Section 7C (discussed below), it is hard enough to get assets into a trust, so it may not be wise to ‘bleed’ growth out of a trust that was set up as a generational wealth transfer trust through making distributions just to save tax that year.
Following the example above, if the trustees sell the building after 10 years and make a capital gain of R5m, they may distribute it to a beneficiary to save tax of R900 000 {R5m x [36% (capital gains tax rate for a trust) – 18% (maximum capital gains tax rate for an individual)}, which seems a great incentive for trustees to distribute the amount to a beneficiary. This is exactly what Sars wants, as the amount will then fall within the estate of the beneficiary concerned, which will attract Estate Duty.
Estate Duty
Estate planners and trustees should be mindful that once distributions are made to beneficiaries, such amounts or assets have to be unconditionally vested in those beneficiaries to qualify for the more favourable tax treatment discussed above. Distributions could either be physically paid to beneficiaries or left in the trust as amounts payable to beneficiaries. In both instances, these amounts are included in and inflate beneficiaries’ estates. It may even push a beneficiary’s estate over the R30m mark, which triggers an additional 5% Estate Duty upon the person’s death, as explained above. Any future income and growth on these amounts (whether the amounts are physically paid out to the beneficiary concerned or retained in the trust for them) also vest in these beneficiaries’ hands, which will inflate their estates.
Potential double tax
After Section 7C was introduced as a ‘prepayment’ of Estate Duty on assumed growth, Sars has made no provision for any rebates on amounts already paid annually (since March 31, 2018) on the assumed growth explained above, against the calculated Estate Duty upon the deaths of beneficiaries who have received distributions during their lifetimes. Following the example above, applying the current rates, double taxation (Estate Duty and Section 7C Donations Tax) will be paid on R355 000 (10 years x R35 500).
Conclusion
When trustees consider distributions, detailed calculations should be performed to understand the total tax consequences resulting from distributions. Each beneficiary’s estate should also be taken into consideration, as one would want to avoid the extra 5% Donations Tax and/or Estate Duty as a result of any transaction or distribution.
If trustees blindly distribute trust income and capital gains to avoid paying higher taxes only for that year, they may trigger other unintended tax consequences.
When free cash is available after a trust asset has been sold, it may be wiser to rather repay a loan attracting Section 7C Donations Tax, as it will forever attract Section 7C Donations Tax, even if it is bequeathed to a family member after the death of the original funder.
Source: Phia van der Spuy
Dec 8, 2023 | Article
To maintain a lavish lifestyle or not was the question the Gauteng High Court (Johannesburg) had to decide. A Pretoria News reports says a wife, who is divorcing her husband, wanted more than R127 000 maintenance a month for herself pending the divorce, as she said her shoes and clothes cost R20 000. Much of the maintenance the wife claims for herself is for entertainment and luxury. She is claiming relatively little for their two children. She argued that her husband had introduced her to a lavish lifestyle and she wanted to maintain that lifestyle.
Apart from her shoes and clothes expenses, the wife said she needed R10 000 and an additional
R35 000 pocket money a month for herself, as well as R20 000 a month for gifts. Regarding maintenance for their two children, she claimed just under R20 000 a month, per child.
The wife is also unhappy about the fact that her estranged husband had moved her and the children from their large home, where he paid R30 000 a month rent. She complained that she had to make do with a much smaller house, for which he paid R9 500 a month. She also wanted a R140 000 contribution towards her legal costs. The husband opposed the maintenance application as he is paying nearly every expense to maintain the household. He is also paying R15 500 a month for the maintenance of their minor children.
Acting Judge Kganki Phahlamohlaka cited case law in which it was said that a spouse was entitled to reasonable maintenance, pending divorce and dependent upon the marital standard of living of the parties, her actual and reasonable requirements and the capacity of her husband to meet such requirements.
According to the Pretoria News report, the judge pointed out that in that case, the wife had a job and earned R17 813 a month. The judge said it was unclear why additional maintenance was needed or why she could not survive on that salary. The judge added that it was common cause that the husband was depositing money in the wife’s bank account but the deposits do not equate to the amount she was claiming for maintenance, especially on entertainment and for a lavish lifestyle.
In light of the other expenses paid by the husband, the judge said the wife could make do on her own salary. ‘The applicant, as a gainfully employed individual, can survive on her income, pending divorce.’ The judge added that the wife had not been candid with the court in respect of her monthly expenses. ‘This is not supported by any evidence and therefore I find it unrealistic that the respondent was spending such a lot of money only for luxuries.’ The husband was ordered to continue paying the R15 500 a month for the maintenance of the children and the other expenses.
Source: LegaBrief
Nov 3, 2023 | Article
- Lawyers say the Master’s Office is causing months, even years-long, delays for crucial legal administrative procedures that should take weeks.
- The Master’s Office oversees numerous legal processes, such as winding-up estates of the deceased and bankruptcy and liquidation matters.
- Problems include a patchy digitisation programme, a staff shortage and a shambolic filing system.
Lawyers complain that the offices of the Master of the High Court are increasingly dysfunctional.
As a result, people are unable to tie up deceased estates, set up or liquidate trusts, or appoint overseers of trusts and estates, among other legal procedures.
According to GroundUp, the Master’s Office also manages the Guardian’s Fund, which manages money for people legally incapable of managing their affairs, such as children or people with mental disabilities.
“The Master’s Office was functioning well enough until Covid,” a Cape Town attorney, who wished to be anonymous, told GroundUp. “They can’t seem to pick themselves up again.”
GroundUp was shown photos, apparently from inside the Johannesburg Master’s Office, that show papers scattered across carpets and desks.
Attorneys say delays at the Master’s Office are unpredictable. Some documents are issued in the required few weeks; others take months.
She said the Master’s Office did not respond to emails or phone calls. Yet members of the public, including attorneys, are unlikely to get hold of any staff if they go to the office.
“There’s no boss taking control,” she said.
Another Cape Town attorney, who also wished to remain anonymous, explained that, when liquidating the estate of a deceased, documents are submitted to the Master’s Office and a letter of executorship should be issued within 21 days. Without this letter, the assets remain frozen.
“It’s a very simple process. They just need to process the documents,” he said.
But now six to 10 follow-ups in person are required to see that it is done. He said it can take nearly a year to just get a letter of executorship.
“You can just assume that the further you are in the process, the more it will be delayed,” he said.
There are 15 steps needed to wrap up an estate, according to Brenton Ellis, from the Fiduciary Institute of Southern Africa (FISA).
According to Ellis, the entire process of wrapping up an estate ought to take six to eight months, “but this turnaround time is currently highly unlikely”.
FISA closely monitors the Master’s Office and has provided an overview of the process and challenges of wrapping up an estate.
Katherine Gascoigne, a Johannesburg attorney, who specialises in work with the Master’s Office nationwide, says: “It holds millions of rands which can’t go back into the economy because heirs can’t access their money. The knock-on effect is enormous.”
Gascoigne said her law firm has applied so often for a mandamus writ – an application to the court to force a government institution to do its job – that it has almost become protocol.
Poor digitisation
The Master’s Office has been trying to speed up its systems through digitisation.
In March, the Gauteng Master’s Offices took more than a decade of files off-site to scan them for easy access.
“We were given a six-week period in which we’d have no access. Now, however, many months later, we still have no access,” said Gascoigne.
She said the online service portal also does not go far enough. “We can’t access any documents and there is no directive as to whether we’ve been approved and what our next step should be.”
The Master’s Office still relies heavily on in-person visits to relay information.
A week ago, Minister of Justice Ronald Lamola launched the new Deceased Estates Portal, which allows people to register deceased estates themselves.
“I have my doubts about whether this is going to be a silver bullet. Staff still need to process and check each and every document,” said a Cape Town attorney.
The new online system has been subject to three cyber-attacks in the last three years. Most recently, the Guardian’s Fund lost R18 million to fraudulent transactions. During each attack, services were suspended for weeks.
The Information Regulator claims the 2021 hack would have been prevented if the Department of Justice had renewed its anti-virus software licences. It fined the department R5 million for violation of the Protection of Private Information Act.
Crispin Phiri, the spokesperson for the Department of Justice, said: “The procurement process, though initiated on time, took much longer than expected and resulted in us having a gap in the support and maintenance of these licences.”
Attorneys we spoke to said Master’s offices, except for Pretoria, are not operational during load shedding.
But Phiri said the Deceased Estate online system “will always be accessible to the public, even during load shedding, because it is centrally hosted from our main data centre that has UPS and sufficient back-up power”.
“It might partially affect the response times (by a few hours) from the Master’s offices that don’t have back-up power because they might not be able to login to the system during those hours of load shedding.”
Chronic staff shortage
While the Master’s Office mostly only provides an in-person service, there is a nationwide staff shortage of assistant masters, who sign off on files and direct the public on what they need to do next.
According to FISA, the Cape Town Master’s Office has a 35% vacancy rate on estate controllers.
Pretoria attorney Francois Bouwer, said: “There’s no leader taking control at the Master’s Office, at least in Pretoria.”
He said the role of Acting Master rotates between staff every few months.
“We’ve had instances where an assistant will issue a query sheet that is not in line with the Chief Master’s directives. They act on their own discretion,” said Bouwer.
Another issue, said Bouwer, was that some staff at the Master’s Office don’t always accept printed copies of court documents.
“We get court orders electronically, which we print and submit to the Master. Some assistant masters don’t accept the court orders because they’re not originally stamped and signed by the registrar. Now, we have to go to the court to get a signed affidavit for each and every document we submit.”
Bouwer said this was not a requirement of any Act or Chief Master’s directive.
Gascoigne said the Johannesburg Attorneys Association offered to help the Master’s Office clear its delays, but they were turned down. She suspects it’s because Master’s Office staff earn overtime for clearing the backlog.
“It’s getting so bad that [the Gauteng Attorneys Association] approached Judge President of Gauteng Dunstan Mlambo to create a specialised court for Master’s Office matters,” she said.
Haphazard filing
Attorneys used to be able to go into the Master’s Office and access non-digitised files, but members of the public and attorneys are now being denied access in Cape Town, Johannesburg and Pretoria.
Van Rooyen said:
Older files are a nightmare, especially with them moving from one storage facility to another.
Most files are not stored on site.
“They often can’t find [the files] in the warehouse. We’ve had matters where we’ve been waiting for files for years.”
A Cape Town attorney, who did not wish to be named, said things went wrong during the Covid lockdown.
“A lot of files were misappropriated and some of them were lost. In a lot of cases, people had to resubmit quite a lot of documentation,” they said.
In August 2022, Lamola said the backlog caused by Covid and a cyber-attack in September 2021 would be cleared by the end of 2022.
Bribery and corruption
Johannesburg attorney Lesley Blake suspected there could be corrupt practices at some offices.
She was recently appointed to a 13-year-old estate case. Apparently, an executor had been appointed by the deceased’s wife, but the dead person was unmarried.
Properties were sold and much of the estate liquidated. The previous attorneys said they had a letter of executorship, but the Master’s Office told Blake that they had lost the files.
In 2021, the Presidency and the Department of Justice empowered the Special Investigating Unit (SIU) to look into dozens of allegations of fraud, corruption and misconduct. The SIU temporarily shut down every Master’s Office in the country to conduct its investigation.
That same year, Acting Chief Master Theresia Bezuidenhout was accused of interfering in disciplinary processes against corrupt employees. She has since been replaced.
Failure to respond to our queries
We attempted to get comment directly from the Master’s Office. On 11 October, we emailed Thelma Setetemela, who has the title Personal Assistant: Chief Directorate Strategy and Policy. She responded on 12 October, stating that she’d forwarded our questions to Penelope Roberts, the Acting Chief Master.
Despite sending follow-up emails, we have received no further response.
Source: GroundUp (Ella Morison)
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