What to do now that farm trusts are under threat

It's a great pity that I have lost the taste for fatty roast lamb. Otherwise the dogs and I would be in for happy times.

Farmers from all over South Africa are inviting me to lecture at “farmers” days”. Not about the looming introduction of carbon tax, but rather the “changes in the taxation of trusts”.

On the way back from the maternity ward, a farmer doesn”t just stop off at the club to drink himself into oblivion at the prospect of paying more than R1m in private-school boarding fees. No, the first stop is the local attorney to establish a trust to own the family farm that one day his sons will inherit, estate duty-free.

The cottage industry of trust administration keeps the legal profession going in the smaller towns. Now they are going to have a bumper crop. The taxation of trusts is going to change, “so let”s terminate the trust”.

The current practice is to cause trust income to be taxed in the trust beneficiary”s hands at substantially lower rates than if taxed in the trust at a flat 40% rate on revenue income and 26.7 % on capital income.

The proposal in the budget speech is that all trust income will be taxed in the trust. Some tax pundits have been anticipating this for years.

The proposal still mobile casino has to go through the parliamentary process before its implementation next year. There are many issues at stake and the final law may well be different to the original proposal.

But the fundamental idea of a farmer”s trust is that the trust will continue long after dad has been buried in the dust. So, as the proposal now stands, a farmer”s trust will not be affected, because there would be no disposal of the farm.

The danger lurks when the farm is sold out of the trust – and the exposure to capital gains tax could be doubled if the proposals are implemented.

On the other hand, if the farmer terminates a trust today, transferring the farm to the family can lead to an immediate capital-gains tax liability based on market value less base cost. A very expensive mistake.

The real issue is: “Can a farmer simply dissolve a family trust?” And the answer can only be found in the trust deed. At all times the trustees must act in the best interests of the beneficiaries and premature termination of a trust may not be that.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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