Any person who applied for the Amnesty on the basis that assets held by a Trust were donated by that person is subject to a deeming provision that those assets in effect belong to him/her and is liable for tax on all income earned therefrom until the Trust disposes of those assets at which stage that person will be liable for Capital Gains Tax. All such assets, however, are not subject to Estate Duty, i.e. they are outside the donor’s Estate. If and when distributed they also are not subject to Donations Tax in that the value of such assets is deemed to be the same value when so distributed by the Trust.

 

Any person who applied for the Amnesty on the basis that assets held by a Trust were donated by that person is subject to a deeming provision that those assets in effect belong to him/her and is liable for tax on all income earned therefrom until the Trust disposes of those assets at which stage that person will be liable for Capital Gains Tax. All such assets, however, are not subject to Estate Duty, i.e. they are outside the donor’s Estate. If and when distributed they also are not subject to Donations Tax in that the value of such assets is deemed to be the same value when so distributed by the Trust.

2. CAN I CHANGE TRUSTEES?

A change of Trustees has no effect whatsoever on the existence or validity of a Trust. The Trust Deed will generally provide for Trustees to resign and in practice it is often done at the request of the Founder albeit there is no compunction on a Trustee to resign. The initial Trustees would of course have to satisfy themselves that resigning would not in anyway prejudice the interests of beneficiaries, i.e. that the new Trustees to be appointed would be fit and proper. As, however, the new Trustees would often be another reputable Offshore Trustee Company but offering lesser fee charges, that query would clearly be answered in the affirmative;  particularly as the investment advisers would generally remain the same.

3. TAX CONSEQUENCE IF RESIDENCE OF TRUST CHANGES

3.1 If, however, the new Trustees appointed were resident in South Africa, there would be a change in the residence of the Trust and the Trust would become a South African taxpayer with all the consequences of being taxable on its worldwide income, but what does not change in any manner, however, is that the assets of the Trust would remain the same and exactly where they are.

3.2 The actual tax consequences of changing residence may be minimal in that any monies received by a beneficiary in South Africa from an Offshore Trust would have been taxable anyway under one Section or another of the Income Tax Act, i.e. as deemed income under Section 7(8) or alternatively on receipt in terms of Section 25(B)(2A). If the income is distributed to a non-resident beneficiary then (as with an Offshore Trust) it will not be subject to South African tax being non-resident income sourced.

3.3 From a CGT point of view to the extent the assets in question required and obtained Amnesty they will be deemed to be owned by the Amnesty Applicant until distributed or disposed of by the Trust at which time CGT will be payable to the extent a gain has occurred since 1st March 2002. Until that time therefore any asset dealings will constitute a gain or loss in the hands of the Founder.

3.4 Changing offshore Trustees to South African residence based Trustees would however, have disastrous consequences if the assets held by the Trust were foreign assets not donated by the South African resident Founder because income and capital gains relating to all such assets which would otherwise not be subject to tax at all being held in tax free offshore tax havens, would become taxable in South Africa because of the residence based system of taxation.

4. POUR-OVER TRUSTS

4.1 It has been suggested that if a new off-shoreTrust is created and the assets poured over into that Trust, provided the original Trust was created before the 1st of July 1997, Section 7(8) of the Income Tax Act will not be applicable, i.e. the donor will not be subject to income tax on the income earned by such assets. Otherwise when assets are distributed by the Trust it may well still constitute a donation by the Founder to such further entity and therefore income earned by that further entity and/or capital gains made by that further entity will still be taxed in the hands of the same Founder for ever and a day.

4.2  However, what is indisputable is that if assets are distributed by the original Amnesty Trust to a second Trust and immediately thereafter into a third Trust, i.e. sales of assets in the hands of the third Trust would not be subject to CGT in the hands of the Founder because the disposal by the second Trust into the third Trust would not be a donation by the Founder but a distribution by an independent Trust. Thus, if you want to avoid CGT as an Amnesty Applicant you will have to arrange for a double distribution of assets to a third and final Trust!

5. ADVANTAGES OF TRUSTS

5.1 South African residents are often not aware that their worldwide assets are subject to a 20% Estate Duty charge on death as well as Capital Gains Tax of 10% on asset value increases since 2001. The solution to this is to ensure that all assets, which have an appreciating value, are placed in a Trust from the outset when first acquired. If the Founder already owns the asset, the Founder can sell it to the Trust via an interest free loan. This results in a non-growing asset, namely a debt, being left in the hands of the Founder and the appreciating assets, i.e. the assets transferred, accruing to the Trust and its beneficiaries. The debt can be written off at the rate of R30 000,00 a year by way of donations by the Founder.

5.2 An example will suffice. Take, for instance, a property now worth R1 million on which transfer duty of approximately R100 000,00 would be payable if transferred to a Trust. Take it that the owner dies 12 years later when the property is worth R5 million equating to a total CGT and Estate Duty liability of approximately R900 000,00 (and allowing for all deductions). Taking the sum of R100 000,00 and compounding it by say 9% a year for 12 years would result a value of approximately R281 300,00 which less CGT and Estate Duty will equate to approximately R200 000,00 (but not including income tax on the interest!) all in, i.e. a difference in value of money in the hands of your family of R700 000,00 in 12 years time.

5.3 From a CGT point of view the Trust offers what can only be described as a superb tax avoidance process. If the Trustees distribute a gain made on the sale of an asset to a beneficiary, that capital gain will be taxed in the hands of the beneficiary at that beneficiary’s marginal tax rate less the primary abatement of R10 000,00. Thus, take a Trust with four minor beneficiaries and distribute a capital gain of say R1 million. Deduct R40 000,00 (4 x R10 000,00) and thereafter CGT would apply at a quarter of their tax rates, i.e. in all probability 4½% and the total CGT paid would be R43 200,00 as against R90 000,00 if in the hands of an individual or R150 000,00 if via a company!

6. CAN WE OWN UP NOW TO OFFSHORE ASSETS AFTER THE AMNESTY?

Many investors who decided not to apply for Amnesty are regretting not doing so. One of the major reasons for this is that it has become self evident that at some stage the existence of overseas funds will become known to taxation authorities. Such is the extent today of international co-operation particularly because of 9/11 that major jurisdictions are exchanging information relating to any investments and income earned. However, I have some good news for such persons namely that I believe that any persons now wishing to disclose such assets to Exchange Control / SARS will be sympathetically dealt with albeit not on the same terms as under the Amnesty but substantially similar.