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It often happens that a trust owns investment property that would be better held by a company which is, in turn, owned by the trust. This is because companies pay 28% Income Tax whilst trusts pay 45%. So, how do we give effect to this without incurring a lot of tax?

Fortunately, s42(2) of the Income Tax Act comes to our rescue as far as CGT is concerned. Provided the property was held for investment and not trade (that is, not with the intention of selling it at a profit) and provided it is transferred to the company in exchange for the issue of at least a 10% share, then the transaction is deemed to have been at the trust’s Base Cost and no CGT is incurred. This is best done by the formation of a new company so that the first issue of share capital can be in favour of the trust, but we would normally consider that the trust should own 100% of the shares. Failing that, if the company already exists (such as a shelf company), it must issue sufficient new shares to the trust that the trust ends up with at least 10% of the total shares.

s9(1)(l)(i) of the Transfer Duty Act is equally generous, and no Transfer Duty will apply.

2 comments

  1. My wife and I are beneficiaries in the family trust . The trust owned a share in a Share in a Share Block Co. The share was worth R750,000 and was transferred into a (Pty) Ltd. Company at a value of R2m . The trust did not sell the share and no money changed hands .
    Is CGT payable by the Trustees , if so , how will this be calculated .

    1. It seems that this was an s42 asset for share swap. For clarity’s sake, the way I read your comment is that new shares were issued to the trust by the company in exchange for the property. If this was done properly, and you should read s42 of the Income Tax Act to be sure, then no taxes apply. i.e No CGT, no Transfer Duty, no Securities Transfer Tax. The only cost is the conveyancer’s fees.

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