To International Trust or Not to Trust?
Is establishing an international trust still worth the tax trouble?
As we have previously observed, there is little love lost between the South African Revenue Service (SARS) and trusts, especially international ones. They are generally considered by SARS to be enabling mechanisms for tax avoidance. That explains why so many measures have been introduced in recent years to discourage their existence.
Not only are they subject in South Africa to the highest tax rates (i.e. 45% normal income tax and 36% capital gains tax), they are also the target of stringent anti-avoidance provisions in South African income tax legislation. See, for example, recent laws discouraging South Africans holding foreign companies through foreign trusts discussed in our newsletter dated 6 May 2020 as well as new measures aimed at tax collection from foreign trusts referenced in our newsletter dated 24 June 2020.
Aside from this, setting up a trust may result in significant initial costs, annual trustee fees and some burdensome compliance requirements to be shouldered.
So does this mean that an international trust is to be avoided altogether?
The answer to this, of course, is a resounding no.
If you wish to protect your wealth from claims of creditors, former partners or even relatives, there is no better legal protection that you can muster than housing them in a trust. Should you want to provide for a dependent that is incapable of managing his or her own affairs because of age or disability, trusts remain a necessity. Where you desire that your beneficiaries enjoy a large asset like a farm or holiday home that cannot be easily divided, having a trust manage it can save them administrative nightmares.
These goals, as noble as they may be, are however all non-fiscal in nature. The real question is whether there is no longer any South African tax benefit in using a trust.
The answer to this is, once again, no but perhaps it is a slightly qualified no. Allow us to explain.
Moving your growth assets to a trust may still spare you from taxes that you may otherwise face upon your death or emigration. Upon either of those events transpiring, you will be deemed for tax purposes to have disposed of all your assets, with certain exceptions. As a result of this deemed disposal, significant capital gains (or income profits if you are trading) may arise in your hands if these assets are worth more than what you paid for them. You (or your executor if after death), will have to come up with the cash to settle any capital gains tax or income tax SARS hits you with.
If the assets are in an independently managed discretionary trust however, they won’t be in your hands and therefore will not form part of SARS’s tax calculation. Also, in the case of death, heirs will not have to worry about estate duties on the assets already transferred to a trust.
It needs to be said that transferring your assets to a trust will result in some tax paid upfront but this may be well worth it if there are significant savings down the line.
Foreign trusts are particularly desirable in the case of prospective emigration as it may mean that there will be no exchange control problems in using them after you have left SA.
So there you have it. Trusts continue to be a viable estate and wealth planning tool which may even reduce the Rands the taxman takes from you depending on your circumstances.
Please contact us should you wish to discuss using international trust. There is a great deal to consider.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.