We are approached by Companies, Corporations or Individuals (in partnerships, sole proprietors, directors or employees/contractors) on a daily basis for professional advice and assistance in regard to their existing business structures (legal and/or financial). A person who wishes to restructure his affairs do so for various reasons. Some of the main important reasons (this should not be seen as an exhausted list) are the following :-
- Planning of his/her estate.
- Protection of personal assets and property.
- Ordering his affairs to avoid or reduce liability for tax.
- Protecting cash flow and ensure liquidity.
- Protection of business assets and property.
- Protection of investments.
- Managing business or related risk and minimizing exposure.
- Generating working capital.
In the process of arranging the legal relations of the taxpayer’s business or to his/her property, various vehicles may be recommended. In many cases trusts are used in achieving the above goals. The flexibility of trusts contributes greatly to their popularity and the multifarious purposes to which they are put. Trusts can operate independently or be implemented into existing infrastructures i.e. company groups, partnerships etc. The implementation of trusts allows the existing structure to continue without any restructuring or interference and simultaneously save costs, effort and time in the implementation process.
In the event where a trust is used and it appears that the trust will inter alia be involved in the generation of income, the trust is registered with the Receiver of Revenue as a provisional taxpayer in accordance with Practice Rule 21. In many instances, and having due regard for the transactions the trust may enter into, directives may be obtained from the Receiver of Revenue to avoid the deduction of employee’s tax.
PERSONAL (INDIVIDUALS) STRUCTURES
Estate Planning
Trusts are unique as tools in a structure or as recognised entities. The uniqueness of a trust lies in the following:
a trust is not a legal person. It has all the qualities and abilities of a person but it is not a person. The South African courts and legislature have decided that a trust does not possess juristic personality except when a particular statute so provides.
a trust inevitably creates a separate immortal estate.
a trust is not owned by any person or persons.
a trust is not created in terms of any legislation and is accordingly not a “creature of statute.
a trust is an agreement and is consequently governed by the laws of contract and not the law of persons.
a trust cannot be liquidated by any “outsider” i.e. a creditor. A trust, being an estate, can however in theory be sequestrated but it is extremely difficult for a creditor to do so for multiple reasons.
trust affairs are private and confidential and it is relatively difficult for those doing or contemplating business with a trust to discover the terms of the trust instrument or the names of the trustees. There is no legal requirement that their names be listed in business documents as in the case of companies or close corporations.
a trust is extremely flexible due to its nature and can take many forms depending on the objectives and goals of the founder of the trust.
The assets and property that vest in a trust are in no way connected to any individual or the estate of the individual.
The major calamities that any natural person or individual may suffer, are death, insolvency and divorce.
The aforementioned calamities have an adverse impact on the estate of the natural person or individual.
Estate Planning therefore deals with the planning of one’s estate with the objective to preserve as much of the estate not only with the focus on one’s death, but also with the objective to protect the assets and property against the other calamities as well.
BUSINESS STRUCTURES
Trusts can also fulfil an active role in business structures.
The advantages of a trust fund in business structures are
* effective control and management of the business;
* protection of business assets or the equity of the business;
* preservation of control of the business;
* protection of cash flow of the business;
* preserving the investment of shareholders, partners etc.
* reduction of tax liability.
Multiple shareholders or partners
Where we are dealing with multiple shareholders or partners in the business, it is best to separate the business structure from one’s personal affairs. The business affairs however integrate with the affairs of the shareholders, owners or partners in the business. Trusts provide the perfect tool to achieve a proper link between business and private affairs, ensuring the advantages listed above, simplifying due and proper continuance of business despite death, divorce or insolvency of any of the individuals.
Sole ownership or family business
In the event of sole proprietors or family businesses, the integration between business and personal affairs increases the exposure and risk. To manage the risk trusts can be used to protect and preserve assets, property and investment.
It is extremely important to realise that structures should be designed for one’s specific needs and trusts are merely tools that one can use to properly plan, manage, conserve and control your estate and business.
TAXATION OF TRUSTS
Taxation of trusts in South Africa
Trusts are regarded as persons for purposes of taxation in South Africa.
Due to the uniqueness of the nature and composition of a trust, trusts are not taxed like any other entity or legal personality such as companies or close corporations.
Trusts can effectively contribute to maximise tax relief and tax savings depending on one’s needs and the proper implementation and integration of trusts into new or existing structures.
Taxation of trusts internationally
Every country in the world has its own tax laws. Trusts are therefore taxed differently in each country.
There are however many tax havens where trusts are not taxed at all.
Due to the fact that trusts are contractual in its nature, trusts can therefore be used with great effect when one deals with international assets, business and affairs. |
