TAX & Family Trust: When & How
In South Africa, family trusts are subject to specific tax regulations. Here are some key points regarding the taxation of family trusts:
1. Income tax: A family trust is regarded as a separate legal entity for tax purposes. It must register with the South African Revenue Service (SARS) and obtain its own tax number. The trust is required to submit an annual income tax return (ITR12T) reporting its income, deductions, and tax liabilities.
2. Tax rates: Family trusts are subject to income tax at a flat rate of 45% for all income generated, excluding capital gains. This rate is significantly higher than the individual tax rates, which are progressive. It's important to note that trusts do not benefit from the lower tax rates applicable to individuals.
3. Capital gains tax (CGT): When a family trust sells or disposes of an asset, it may be liable for CGT. The trust must calculate the capital gain or loss on the disposal of the asset and include it in its income tax return. The CGT inclusion rate for trusts is 80% (compared to 40% for individuals), meaning that 80% of the capital gain is added to the trust's taxable income.
4. Donations tax: If assets are transferred into a family trust by way of a donation, donations tax may be applicable. The current donations tax rate in South Africa is 20%, but there are annual exemptions and other allowances that may apply.
5. Trust distributions: When a family trust distributes income or assets to beneficiaries, the beneficiaries may be subject to income tax on those distributions. The distributions are taxed in the hands of the beneficiaries according to their individual tax rates.
It's important to consult with a qualified tax professional or accountant who specializes in trust taxation to ensure compliance with the relevant tax laws and to optimize the tax efficiency of the family trust. Trust taxation can be complex, and professional advice tailored to your specific circumstances is recommended.