Tax blow to trusts

Robyn Holwill of Moneyweb

20 March 2008  

SARS to charge hefty tax for changing your trust's beneficiaries.  

If you change the beneficiaries of your trust, the consequences could be expensive. In the recent case involving the T-Trust, the Johannesburg Tax Court ruled that where all the trustees and beneficiaries of a trust were substituted, a new trust was created with significant tax consequences for the T-Trust.

The court was asked to consider whether transfer duty was payable. T-Trust's primary asset was immovable property situated in Houghton. In exchange for an amount of R1,9m, which was applied to discharge various loan accounts, the trustees and beneficiaries of the T-Trust all agreed to resign and new trustees and beneficiaries were appointed in their place.  No actual registration of transfer of the property took place.

The court concluded that transfer duty was payable for two reasons. Firstly, the court considered the Transfer Duty Act, 1949 ("the Act"), prior to the amendments effected by the Revenue Laws Amendment Act, 2002 ("the Amendment Act"). The Act provides that "there shall be levied... a transfer duty on the value of any property... acquired by any person ... by way of any transaction or in any other manner... ".  The definition of "person" includes a trust and the definition of "transaction" includes "any agreement whereby one party thereto agrees to sell, grant, donate, cede, exchange, lease or otherwise dispose of property to another..."

The court held that a "transaction" as contemplated in the Act had taken place since the "change of identities of the beneficiaries and trustees of the trust was occasioned in circumstances where predominantly the sole asset in the trust is the property and in reality what occurred is the outgoing beneficiaries losing all their rights in the trust and the incoming beneficiaries acquiring the rights so lost by the outgoing beneficiaries".

Secondly the court considered the amendments to the trust deed made by the substitution of all the beneficiaries in determining whether in fact a new trust had been created, legally separate and distinct from the original T-Trust. The T-Trust was formed with the specific object and purpose of benefiting the family of the donor. Any substitution of beneficiaries must be in accordance with the object and purpose of the trust. By substituting all the beneficiaries for family members of a another family unrelated to the donor, a new trust had been created in view of the fact that the object and purpose of the T-Trust, as envisaged by the donor, had come to an end. 

This case pre-dates the 2002 Amendment Act which clearly provides that transfer duty is payable in such circumstances. However, transactions that took place prior to December 13 2002 where no duty was paid are now vulnerable to attack by SARS, based on this recent judgment.  

Trustees of trusts need to treat with caution any major amendments to trust deeds, so as not to deviate entirely from the objects and purpose of the trust. Not only is transfer duty a risk, but other transaction taxes such as CGT and stamp duty may inadvertently become owing as a consequence of such amendments.