Taxation in South Africa and the use of trusts as an effective estate planning and tax saving mechanism.

Abstract

The Income Tax Act, 58 of 1962 provides for the taxation of income, capital gains as well as donations which are received by, accrued to, or in favour of natural persons, companies as well as trusts however there are also other Acts which cater for the various other taxes and duties which include amongst others, the Estate Duty Act, 45 of 1955; the Transfer Duty Act, 40 of 1949 and the Value-Added Tax Act, 89 of 1991. The use of trusts in South Africa is still relatively young, so much so, that despite this tool being brought to South Africa by the 1820 English Settlers, the first South African case to deal with its validity occurred in 1915, in the case of Estate Kemp v Mc Donald’s Trustee, which case then led to the incorporation of trusts into South African Law. The taxation of trusts is an ever increasing concern for the Taxman as trusts have been used and are still to an extent being used as a vehicle for the avoidance of the various taxes and duties that exist in South Africa today. The avoidance of taxes and duties is not in itself unlawful save for where the Taxpayer seeks to achieve this avoidance through means explicitly forbidden by the Taxman; this phenomenon is referred to Tax evasion. The avoidance of taxes and duties, ultimately its evasion has led to the Taxman creating and enacting legislative provisions to counter and combat the attempts made at doing so, these are commonly known as the anti-avoidance measures of which exist both general and specific measures. These provisions have made it increasingly more difficult for the honest Taxpayer to lawfully minimise his taxes and duties, however the minimisation of some of these taxes and duties are not entirely unattainable. Estate planning and the use of a trust as a mechanism to achieve certain objectives, one of which is the minimisation of these taxes and duties has occurred and still continues to occur in today’s society. A well prepared estate plan wherein a trust is utilized by the Taxpayer (Estate planner), can still legally result in the minimisation of certain taxes and duties which ultimately is a major objective.