The Davis Tax Committee report on estate duty indudes recommenda­tions regarding the taxation of tmsts. Trusts are creatures both of statute and common Jaw and have developed over many decades.

Trusts have various uses includ­ing protection of assets from credi­tors, continuity of ownership on death of the estate planner, preser­vation of wealth, control of finan­cial support for descendants and tax efficiency. In respect of income and capital gains, trusts are taxed at the rate of 41% for income and effectively 27.3% on capital gains. If the deed allows it, trustees can distribute in­come and capital gains co beneficiar­ies who will enjoy a lower marginal tax rate.

One of the far-reaching proposals by the Davis Commission is that this discretion, referred to as the "conduit principle'-', should not be used to lower the rate at which trusts wouJd be taxed. This would have for.reaching effects. It will greatly affect beneficiaries and persons who have established trusts for their retirement planning.

The Davis Commission's view is that trusts are used to avoid estate duty and this prejudices the government in its co!Jection of taxes. There are other uses for trusts, for example, employee share ownership and Broad Based Black Economic Empowerment. The financial servic­es industry also uses trusts to separate a fund vehicle from the benefi.ctaries of a fund. The Commission proposes that interest free loans to ttusts are being abused and under scrutiny. It also recommends that distributions from foreign trusts be taxed as income, even if the offshore trust is distributing capital and not income. The Commission has over­acted with regard to the potential loss to the fiscus with regard to tlie taxation of trusts.

The Income Tax Act No 58 of 1962 already contains provisions in Section 7 which allow Sars to enforce compliance when It comes to avoidance of tax, particularly with regard to family income splitting and using trusts to do so. Tite newly published trust income tax return assists greatly in this re­gard, but it seems that Sars is not en­forcing the powers it has under the Act. lf one has an existing trust. now is not the time to panic and terminate it. Time will tell whether these recommendations will be imple­mented. Perhaps the Minister of Fi­nance will enlighten us in the Budget speech.

Even if an announcement is made, it remains to be seen exactly what the changes will be. It is therefore prudent to ob­tain professional advice before mak­ing decisions. Trusts are here to stay and will continue to play an important role in the economic life of the country and should not be discarded before careful analysis and planning.