The big news is that trusts are now taxed at 45%, up 4% in line with the new top marginal rate for individuals on taxable income in excess of R1.5 million.
The good news is that the company tax rate remains unchanged at 28% – further reason to take advantage of the company tax rate by structuring your trust to hold its assets via a company and not directly by the trust. Although dividend withholding tax has increased to 20% on dividends declared by a company, the funds not distributed and reinvested by the company are still only taxed at 28%, allowing the company to become a tax-efficient vehicle to grow wealth by minimising the share due to SARS.
With the top marginal rate increasing, Capital Gains Tax now increases to a maximum effective rate of 18% for individuals, 36% for trusts, but remains unchanged at an effective rate of 22.4% for companies.
Note that despite the increase in income tax and the effective capital gains tax rate, these higher tax rates applicable to trusts can still be avoided by ensuring that income and taxable gains are vested in the beneficiaries during each year of assessment. The increase will therefore not affect the majority of trusts.
As for property taxes, the transfer duty-free bracket has been increased from R750,000 to R900,000. Note that if you purchase commercial property in a VAT registered structure as a going concern, no transfer duty is paid and most transactions achieve a zero rating with no VAT consequences on disposal.
With the continued increase in taxes on capital, and double taxation via capital gains and estate duty on death, wealth protection remains a critical challenge, with your trust still the only effective tool to achieve asset protection and wealth preservation. With the new provisions affecting interest-free loan accounts to trusts, it is strongly recommended that a company is utilised to hold growth investments, with a trust holding the shares in the asset growth company.
Please don’t hesitate to contact us with any further queries concerning your trust and the recent budget proposals.