How income bypasses a trust using the conduit principle
Trusts are taxed at 45%, but that rarely matters because they should not earn taxable income, and, if they do, it should bypass the trust completely. Here’s how.
Provided taxable income received by or accrued to a trust is distributed to a beneficiary prior to the trust’s tax year end (28 February), then it may flow through a pipe, or conduit, directly to the beneficiary without touching the trust at all.
The nature of the income is unchanged. That is, a dividend remains a dividend, interest remains interest, rent remains rent, a capital gain remains a capital gain etc, and is taxed in the hands of the beneficiary as if the trust did not exist.
This means that the trust does not need a bank account to receive or distribute the income and does not need to register as a taxpayer (because it does not earn taxable income).
Whilst this can be advantageous if the beneficiary is on a low marginal tax rate, the downside is that it siphons wealth out of the trust whose very purpose was to grow wealth and protect it from creditors and taxes on death. It would have been far better if the trust never earned income in the first place and that is achieved by interposing a company between the trust and the investment, then the company pays the tax.
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Good morning. I don’t know if I may ask this question: If a trust uses the conduit priciple, can the benficiaries only be natural persons or will a CC also qualify? Do you also do consultations online? If so, your tariff structure please.
Hi Fanie,
Yes, a CC will also qualify. Of course, it has to be a beneficiary of the trust.
I consult online via Zoom and there is never a charge. I do it because it is my passion. You can book as often as you like here https://harbourassociates.youcanbook.me/
Hi Fanie,
For the sake of other readers and subsequent to our email correspondence, I am posting here the relevant section of the income Tax Act.
25B. Taxation of trusts and beneficiaries of trusts.—(1) Any amount (other than an amount of a capital nature which is not included in gross income or an amount contemplated in paragraph 3B of the Second Schedule) received by or accrued to or in favour of any person during any year of assessment in his or her capacity as the trustee of a trust, shall, subject to the provisions of section 7, to the extent to which that amount has been derived for the immediate or future benefit of any ascertained beneficiary, who is a resident and has a vested right to that amount during that year, be deemed to be an amount which has accrued to that beneficiary, and to the extent to which that amount is not so derived, be deemed to be an amount which has accrued to that trust.