Does it make sense to donate assets to your trust structure? Oddly enough, despite Donations Tax, it sometimes does.

There are two ways to move owned assets into a trust structure. Let’s look at the most common method –

1) Sell the asset on loan account. Because the trust and its company are connected persons to the seller, the transaction will be deemed to be at market value for all tax purposes. Let’s say that the asset cost R4m and the deemed market value is R6m.

The seller will pay Capital Gains Tax and, if the asset is fixed property, the purchaser will pay Transfer Duty.

Those are the taxes that we all know about, but now there’s another one. If you charge the company interest at the official rate, then you will pay tax on that interest at a rate determined by your marginal tax rate. The company will deduct the interest for tax purposes and save 28%. the net effect is shown by the grey (marginal tax rate of 40%) and yellow (marginal tax rate of 45%) on the graph below.

If you don’t charge interest, then the uncharged interest is deemed to be a donation every year to the company. You and your spouse can each donate R100 000 a year free of Donations Tax but the remainder will be subject to Donations Tax at 20%. The effect of this is shown by the blue line. So the choice between interest and deemed donation will depend upon the amount of the loan and your marginal tax rate.

2) The alternative is to donate the asset to the trust owned company. Capital Gains Tax and Transfer Duty are still payable, but there’s no loan, so there’s no deemed interest. The kicker is that Donations Tax is 20% and that’s R1,2m in the R6m example above. Taking into account the time value of money at 6% inflation, it will take you 22 years to recover the Donations Tax through saving of tax on interest. So this doesn’t look like such a good idea.

But we’ve oversimplified. In the first case, you would die with an asset (the debt) of R6m and your estate would pay 20% Estate Duty on that, that is R1,2m. The present day value of that R1,2m will depend upon when you die. In the second case you would die without the asset and no Estate Duty would be paid.

Also, during your lifetime, your creditors can attack the R6m asset (the debt that you own). In the second case you do not own a debt and they have nothing to attack.

Hmmmm!

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