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set out the concomitant tax consequences of a trust constituting a Special Trust (Type A); and set out the procedures to be followed when an application for the approval of a trust as a Special trust (Type A) must be dealt with.
In his Budget Review of 1998 the Minister of Finance announced the introduction of separate rates of tax applicable to trusts. These rates of tax are, however, not applicable to Special Trusts which are taxable at the rates applicable to persons other than companies or trusts.
When the definition of a "special trust" was initially introduced, it only referred to a trust created solely for the benefit of a person who suffers from a defined mental illness or a serious physical disability, where such illness or disability incapacitates that person from earning sufficient income to maintain him/her. These trusts are referred to in this document as Special Trusts (Type A).
This definition was, however, extended with effect from the 2003 year of assessment to also include certain trusts established by or in terms of the will of a deceased person for the benefit of inter alia relatives that are under the age of 21 years. These trusts are referred to in this document as Special Trusts (Type B).
The provisions relating to Capital Gains Tax (CGT) that apply to special trusts are only applicable to the first-mentioned category of special trusts.
In order to ascertain whether a trust constitutes a special trust it is necessary to ensure that the trust meet the relevant requirements as set out in the definition of a "special trust".
any "mental illness" as defined in section 1 of the Mental Health Act, 1973 (Act No.
by or in terms of the will of a deceased person, solely for the benefit of beneficiaries who are relatives in relation to that deceased person and who are alive on the date of death of that deceased person (including any beneficiary who has been conceived but not yet born on that date), where the youngest of those beneficiaries is on the last day of the year of assessment of that trust under the age of 21 years.
This type of trust is defined in paragraph (a) of the definition of a "special trust".
The trust should have been created solely for the benefit of a person that suffers from a defined mental illness as defined in section 1 of the Mental Health Act, 1973 or a serious physical disability.
A "mental illness" is defined in the Mental Health Act as "any disorder or disability of the mind, and includes any mental disease and any arrested or incomplete development of the mind".
To determine whether a person suffers from a serious physical disability, it is necessary to determine the extent of his/her physical disability. Handicapped persons are inter alia regarded as persons who suffer from serious physical disabilities.
A blind person as contemplated in the Blind Persons Act, 1968 (Act No.
A person who requires an artificial limb.
The requirement that the trust must have been created solely for the benefit of such person does not necessarily mean that such person should have a vested right to the income/capital of the trust. However, in order to qualify as a special trust the Trust Deed or Will should not make provision for or grant a discretion to the trustee(s) enabling any other person to obtain a vested right to any income or capital of the trust as long as the beneficiary for whose sole benefit the trust has been created, is alive.
unfit to manage his/her own financial affairs; or if he/she has attained the age of 18 be unfit to obtain by virtue of any service, employment or profession the means needed to enable him/her to provide for his or her maintenance.
The beneficiary of the trust should be alive on the last day of February of the relevant year of assessment. of the trust.
Even if a trust complies with the above-mentioned requirements, it is a further requirement that the beneficiary of the trust should be alive on the last day of February of a year of assessment in order for the trust to constitute a Special Trust (Type A) for that year of assessment.
The trust will, therefore, not continue to constitute a special trust once the person for whose sole benefit the trust was created dies and will cease to be taxed as a special trust from the year of assessment during which the beneficiary dies.
The trust should have been created solely for the benefit of persons who are relatives of the deceased person that created the trust in terms of his/her will.
"in relation to any person, the spouse of such person or anybody related to him or his spouse within the third degree of consanguinity, or any spouse of anybody so related, and for the purpose of determining the relationship between any child referred to in the definition of "child" in this section and any other person, such child shall be deemed to be related to its adoptive parent within the first degree of consanguinity".
The concept "relative" should not be confused with the concept "connected person". "Relative" does not include a trust of which a relative of the deceased person is a beneficiary.
All the beneficiaries of the trust should have been alive on the date of death of the deceased person.
If, for example, one of the beneficiaries of the trust died prior to the date of death of the person who created the trust and his/her estate will benefit from the trust, the trust will not constitute a special trust. A trust can, however, still be regarded as a special trust if one of the beneficiaries dies subsequent to the date of death of the deceased, as long as the trust complies with the other requirements.
Any person who has been conceived but has not yet been born on the date of death of the deceased person will be regarded as a person that was alive on the date of death of the deceased person.
The youngest of the beneficiaries should be under the age of 21 on the last day of February of the relevant year of assessment of the trust.
Even if a trust complies with the above requirements it is a further requirement that the youngest of the beneficiaries of the trust should be under the age of 21 on the last day of the relevant year of assessment of the trust. Where the youngest beneficiary of such a trust attains the age of 21 before or on the last day of February of a year of assessment of a trust, the trust will not constitute a special trust anymore - not in respect of that year of assessment or subsequent years of assessment. The trust will thus cease to be taxed as a special trust from the trust's year of assessment in which the youngest beneficiary attains the age of 21.
All provisions of the Act that are applicable to trusts or persons that are not natural persons are also applicable to special trusts. As in the case of any other trust, the income derived by means of a special trust is taxable in the trust during a particular year of assessment, if no ascertained beneficiary acquired a vested right to such income during that year of assessment. Where an ascertained beneficiary acquired a vested right to the income during that year of assessment, such beneficiary would be taxed on that income.
It must be noted that the anti-avoidance provisions, for example the provisions of section 7(3) or 7(5) of the Act, can also be applied in respect of income derived by means of a trust that constitutes a special trust.
All special trusts are taxable at the rates of tax applicable to persons other than companies or trusts, which currently vary from 18 per cent to 40 per cent.
Although special trusts are taxable at the rates applicable to persons that are not companies or trusts, special trusts are not regarded as natural persons and do not qualify for any rebate or exemption that is only applicable to natural persons (i.e. the primary rebate or the basic investment exemption).
For CGT purposes, a special trust means a trust contemplated in paragraph (a) of the definition of "special trust" in section 1 of the Act (i.e. paragraph [b] is excluded for CGT purposes).
ï·ï Paragraph 10 which sets the taxable capital gain for a special trust at 25 per cent of the net capital gain.
ï·ï Paragraph 53(1) which stipulates that a special trust must disregard a capital gain or capital loss determined in respect of the disposal of a personal-use asset as contemplated in subparagraph (2); ï· Paragraph 59 which stipulates that a special trust must disregard a capital gain/loss determined in respect of a disposal that resulted in that special trust receiving compensation for personal injury, illness or defamation of the beneficiary of that trust.
Paragraph 82 of the Eighth Schedule preserves the status of a trust as a special trust after the death of the beneficiary for whose sole benefit the trust was created, until the earlier of the disposal of all assets held by the trust or two years after the date of death of that beneficiary.
For CGT purposes, any reference to a beneficiary of a special trust, is a reference to the person for whose sole benefit such trust was created and does not also refer to any substitute beneficiary or person that could obtain a vested right to the income or capital of that trust subsequent to the death of the person for whose benefit the trust was created.
The approval of trusts as Special Trusts (Type A) has previously been dealt with at Head Office level. This function has now been delegated to the SARS branch offices. The approval and concomitant registration of such trusts must be done at the SARS branch office closest to the domicile of the trust.
The approval of such a trust these trusts must be done by comparing the content of the trust deed of the trust with the characteristics of a Special Trust (Type A) as set out in part 3.2 1of this document. The approval and registration will also be subject to the condition that all future proposed amendments to the trust deed, after the trust has been approved and registered by SARS, must be submitted to the SARS branch office for approval before they are effected and handed in at the office of the Master of the Supreme Court.
A Special Trust (Type B) does not require any approval from a branch office of SARS to be registered as such a type of trust.
return of the trust. From the trustee(s) perspective, it is sufficient to indicate on page 1 of any return of income that is submitted to SARS for such a trust, that the trust is regarded as a Special Trust (Type B). The trustees must, furthermore, ensure that the relevant parts of the return of income that relate to special trusts are completed.
Annexure A illustrates the process to be followed n order to determine whether a trust constitutes a Special Trust: Type A or Type B.
Examples of letters of the approval and non-approval of trusts as Special Trusts (Type A) are attached as Annexure B. These letters must, however, be adjusted according to the specific facts pertaining to each trust.
Was this person still alive on the last day of the year of assessment?
Was the youngest of the beneficiaries on the last day of the year of assessment of the trust under the age of 21?
Is the trust created solely for the benefit of a person who suffers from a defined "mental illness" or a physical disability?
Does the illness or disability incapacitate such person from earning sufficient income for his/her maintenance or from managing his/her own affairs?
Is the trust created by or in terms of the will of a deceased person, solely for the benefit of beneficiaries who are relatives in relation to that deceased person and were they all alive on the date of death of the deceased person?