This article aims to provide an overview of South African trusts.
There are generally two types of trusts used in South Africa, inter-vivos trusts and testamentary trusts. An inter-vivos trust is created by contract whilst the settlor is alive, whereas a testamentary trust is created from the valid will of the deceased.
Types of trusts
Vesting and discretionary trusts are widely used in South Africa. Special trusts which have taxation advantages are also used but are restricted to benefitting a person suffering from mental illness or severe physical disability which stops them from being able to work, or by a testamentary trust created for the benefit of minor children relatives of the deceased.
Use of trusts
A trust can generally be used for a private benefit or for a charitable purpose. Private benefit trusts are mainly used to protect assets or as an estate-freezing vehicle in South Africa.
Testamentary Trusts are generally used to hold assets of minor children until they reach maturity. The trust usually makes provision for education, welfare etc of the minor children.
A grant maker must review the trust deed to confirm that it meets the requirements of a charitable trust in South Africa.
South African trust law is made up of elements of Roman-Dutch and English law which have been adapted to provide a distinct South African law which meet the requirements of the South African market. The main statute which governs South African trust law is the Trust Property Control Act 1988 (‘TPCA’). South African trusts are also governed by common law.
The trust is created when property is transferred by written agreement, testamentary writing or court order. Section 1 of the TPCA does not limit the type of beneficiary who can benefit under a trust as beneficiaries are described as “the person or class of persons designated in the trust”. The objective of a trust must be lawful and certain in accordance with Deedat and Others v The Master and Others (1995)(2) SA 377(A).
There are no rules which restrict the perpetuity period of a trust.
Section 13 of TPCA allows a “trustee or any person.(having) sufficient interest in trust property” to apply to the court to change trust provisions or end the trust where the provisions of the trust are against the public interest or jeopardise the beneficiaries interests or trust objective.
Trustee authorisation and supervision
Section 6 of the TPCA requires trusts to be registered with the Master of the High Court, before trustees are able to perform their role.
Testamentary trusts only require the completed acceptance of each trustee and all the requirements stated in form JM21 to be submitted.
Inter-vivos trusts are also required to submit the original trust deed or notarised certified copy (which should include R100 in uncancelled or impressed stamps on the deed) and a bond security submitted in Form J344 if required by the Master.
Section 4 of the TPCA provides the Master with powers to hold trust deeds and supervise trustee appointments.
Section 17 of TPCA requires trustees to keep documents for at least 5 years from the date of the trust termination, whilst section 16 of the TPCA provides the Master with the power to review trustee handling of trust property.
Role of trustee
A trust does not have separate legal personality. However, Section 12 TPCA requires trust property to be held separately from the trustees personal estate. The liability of trustees to trust creditors is limited to the trust property and does not extend to their personal estates.
Under section 9(1) of TPCA, trustees must ‘act with the care, diligence and skill which can be reasonably be expected of a person who manages the affairs of another.” The Trustees have a fiduciary duty to the beneficiaries of the trust. They must not act in a way which violates this duty or is outside the parameters of the trust deed.
Section 22 of TPCA permits a trustee to receive reasonable remuneration where the trust deed does not contain any provisions on trustee remuneration. Any disputes are ultimately settled by the Master who will determine the amount of the remuneration in such circumstances.
Section 20 of TPCA allows “a trustee or any person having sufficient interest in trust property” to apply to the court to remove a trustee if they have been convicted of a crime such as dishonesty, fail to provide the required security, become bankrupt, mentally ill or fail to perform their duties satisfactorily.
Section 21 of TPCA allows a trustee to resign by providing written notice to the Master and beneficiaries (or their guardians where they are minors) of the trust.
Income tax is imposed on a South African residents worldwide income. The income tax rate for trusts is 40%.
However, where a trust is making distributions to beneficiaries then the trust does not pay tax at 40% but the distributions are taxed at the beneficiaries tax rate.
Capital gains tax is imposed on a South African residents worldwide income. There is an annual exclusion of ZAR30,000 (2015.16) for individuals and special trusts. Any taxable net is gain is based on the proportion of the gain. For Special Trusts this is 33.3% of the gain which is taxable and trusts other than Special Trusts it is 66.66% of the gain which is taxable.
The transfer duty which is levied on the transfer of immoveable property is 10% for trusts.
Trust taxation where a South African trust only holds a Life Account 2 or Investment Portfolio
In South Africa domestic sinking funds are taxed in accordance with Section 29A of the Income Tax Act. This is commonly known as the four-fund approach. This means that the insurance company’s contract holder funds are taxed at a rate of 30%.
However, due to the relationship between Old Mutual Life Assurance Company (South Africa) (Pty) Ltd and our service company there is no tax in South Africa or the Isle of Man or Guernsey in respect of returns earned on behalf of the Contract Holder. In essence, any returns on the Investment Portfolio or Life Account 2 accumulate tax free.
It is possible that withholding tax may be deducted from some of the dividends at their country of origin. However, once the dividend is received, its reinvestment can accumulate tax free inside the Investment Portfolio or Life Account 2.
Buying and selling assets within an Investment Portfolio or Life Account 2 will attract no personal liability to capital gains tax.
These tax impacts assume that no significant changes have been made to the original contract, for example, change of contract holder.