Special Trusts Have Tax Advantages

Special trusts may hold a host of tax benefits, from certain exclusions on capital gains tax to possible exemption from the proposed trust taxation reform measures.

A special trust is a trust created either:

• for the sole benefit of one or more people related to each other and who suffer from a disability as defined in Section 6B(1) of the Income Tax Act (effective from 1 March 2014). The disability must prevent them from earning enough income for their maintenance or from managing their own financial affairs, and must now be lasting and diagnosed as well; or
•  in the will of a deceased person solely for the deceased’s relatives alive or conceived on date of death, of whom the youngest is under 18 years on the last day of the year of assessment of the trust for tax purposes.

 Tax advantages

• The sliding scale for normal income tax purposes as for natural persons ranging from 18% to 40% is applicable and not the fixed rate of 40% as applicable to other trusts.
• The annual exclusion for capital gains tax purposes is available to special trusts.
• The primary residence exclusion for capital gains tax purposes is available to special trusts.
• On disposal of personal-use assets by a special trust, capital gains or losses thereon may be disregarded.
• A special trust may disregard capital gains or losses on compensation for personal injury, illness, or defamation of the beneficiary of the special trust.

A special trust may use the 33.33% inclusion rate for capital gains tax purposes (as is the case for individuals) instead of double that inclusion rate, which trusts other than special trusts have to include as taxable capital gains.

The proposed trust taxation reform measures announced by Treasury will not be applicable to special trusts.

Attaining special trust status

SARS may grant special trust status to complying trusts for disabled persons on application. For complying trusts for minors SARS will use the information on the trust tax return to ascertain whether the trust qualifies as such.