If you want to have your cake and eat it, take a slice or two, not the whole cake.
There has been lot of noise generated by the Supreme Court decision in Webb v Webb* regarding the settlor reserved powers aspect of the case, little of which is worth the airtime. Many practitioners have been warning for years about taking liberties with reserved powers and the danger of stretching the concept too far. Like an elastic band, stretch it far enough, and it will snap.
In this case, reserving a personal (as opposed to fiduciary) power for Mr Webb to declare at any time that he was the only beneficiary of the Trust, made it an easy decision that he had failed to make an effective disposition of property, as the rights he enjoyed in respect of the trust assets, were indistinguishable from personal ownership. Had he not had this power, then it would have been interesting, based on the extensive other powers he had reserved, to see whether he had created a valid trust or not.
Prudent practitioners have always had reservations about taking things to extremes, whether it be about trying to oust the responsibilities for which a professional trustee is paid (as in Zhang v DBS – can you really have a trustee with no obligation whatsoever for oversight?), or about creating trusts with so many reserved powers that you scratch your head and wonder whether it is a trust, or any form of disposition, at all. It is good to see the courts across the world putting the brakes on. If you want to have your cake and eat it, take a slice or two, not the whole cake.
The more interesting aspect of the case was the tax point, which was considered in the context of whether a New Zealand tax debt should be taken into account in determining the value of matrimonial property situated in the Cook Islands. The debt was found to be unenforceable in the Cook Islands.
The conclusion (by 2-1 Lord Wilson dissenting) confirmed that you cannot enforce one country’s tax judgment abroad. This is an entirely conventional principle but interesting in this case because of the legislative and constitutional relationship between the Cook Islands and New Zealand, more particularly section 655 of the Cook Islands Act 1915, which states that: “Bankruptcy in New Zealand shall have the same effect in respect to property situated in the Cook Islands as if that property was situated in New Zealand”.
Mr Webb had been declared bankrupt with the main judgment debtor being the Commissioner of the Inland Revenue. It is highly arguable that the Commissioner should have been in the same position as any other judgement debtor in bankruptcy looking to enforce their rights under section 655.
* Webb v Webb (Cook Islands) 2020 UKPC 22
The absolute discretion of trustees is often emphasised when discussing competing interests of beneficiaries. This is particularly so as, although the court has jurisdiction under Jersey law to intervene in the exercise of the trustee’s discretion, it will not do so lightly.
The trustee of a Jersey trust was recently faced with the decision of whether it should add the settlor’s spouse as a beneficiary to the settlement in her own right. In the interesting judgement of B v Erinvale PTC  JRC 213, the court found that the decision made by the trustee not to add the settlor’s spouse as a beneficiary in her own right, was a decision that no reasonable trustee would have made.
The considerations of the court shed some light on a very relevant and current issue – the trustee’s power and duties when considering the interests of the settlor’s spouse, particularly concerning a person who will cease to be the settlor’s spouse.
The case arose against the background of matrimonial proceedings between the settlor, C, and the settlor’s spouse, B. They have been married for 23 years, and now have one adult child. Each of B and C have two children from previous marriages.
Fifteen years into their marriage, C created the A Settlement and settled the whole of his free estate into the settlement. The settlement is governed by Jersey law, and the beneficial class is described as the settlor, the settlor’s spouse, and the settlor’s children and remoter issue.
C’s letter of wishes expresses his wish for the trustees to provide for B, in particular by setting aside an amount of £4m for her, of which £1m was to be made available to her and the balance invested to provide B with a monthly income. The property in which B lived was to be made available to her during her lifetime (although another trust owned this property).
With all C’s free assets being within the settlement, B was concerned as to her status as a beneficiary as C’s spouse. An interim order for the divorce between B and C had been issued, and the parties agreed that the final order would not be issued until B’s ancillary application was finalised. If C were to die before the divorce order was made final (C was diagnosed with a brain disease in 2012), or if C were to die after the divorce order was made final, but before orders for ancillary relief (a maintenance claim to be paid by the settlement) were made, B would cease to be a beneficiary of the settlement before she could obtain relief under the matrimonial proceedings.
For this reason, B applied to the court to be appointed as a beneficiary in her own right.
The trustee considered appointing B as a beneficiary in January 2020, resolving not to add her as a beneficiary at that time. As the court essentially reviews this decision, its details are crucial to the case.
The court summarised the trustee’s decision as follows:
“From the perspective of the A Settlement, there are competing interests as between the beneficiaries which have to be balanced and [the trustee] submits that it has done that impartially and reached a reasonable conclusion for the reasons set out in the minute, but in particular:
- B is currently a beneficiary;
- She is currently receiving substantial financial support;
- [The Trustee] had given the clear indication that she would be appointed a beneficiary in her own right should C die before the [divorce] decree was made absolute and this without fettering the future exercise of [the trustee’s] discretion as trustee. It was essentially a question of timing with [the trustee] not being prepared to appoint her “at this time”…”
The trustee could not confirm the settlor’s wishes in respect of this decision, due to his lack of capacity. Not surprisingly, C’s children and grandchildren were opposed to the addition of B as a beneficiary. The trustee also considered that B is likely to receive substantial relief under the matrimonial proceedings, and that, seeing as the settlement would abide by any order of the court in that sense, it would likely be inappropriate thereafter for B to remain a beneficiary in her own right on an ongoing basis, partly because any resolution under the matrimonial proceeding was likely to be on a ‘clean break’ basis.
Court’s considerations and finding
The court was asked to exercise its jurisdiction under Article 51 of the Trusts (Jersey) Law 1984 (the ‘Law’), under which the court may make an order concerning, amongst other things, the trustee’s exercise of any power or discretion.
The court remarked that, whilst its jurisdiction under Article 51 is wide, it must be exercised on a sensible and principled basis. Referring to the principle of non-intervention by the courts, and the judgment in S v Bedell Cristin  JRC 109, the court concluded that it fell upon B to challenge the decision of the trustee not to add her as a beneficiary in her own right, by showing –
- “That the decision was one which no reasonable trustee could have arrived at, or
- In taking the decision it failed to take into account a relevant consideration or took into account an irrelevant consideration.”
It was noted by the court that, procedurally, it was seized only with the application under Article 51 and that it was sitting in its supervisory role in respect of trusts. As such, the court was not concerned with doing justice between C and B, but instead, it was only concerned with the interests of the settlement’s beneficiaries.
The court found that the considerations taken into account by the trustee were relevant, and that it had in fact considered the matters which B alleged it did not (namely that the Matrimonial Court would be disempowered upon C’s death and the effect on B if she were to lose rights under the settlement). However, the court found that the trustee had not truly taken B’s position and concerns into account or given them sufficient weight.
As to the reasonableness of the decision, the court noted that the key reason the trustees put forward for not appointing B as a beneficiary in her own right, was one of timing – it was prepared to appoint her, but not now. The court rightly pointed out that a trustee cannot fetter the future exercise of its discretion, resulting in the possibility that some external event may prevent B’s appointment in the future. If this were to happen, B would be an outsider to the trust and would face the prospect of having to fund an application as an outsider to be readmitted into the beneficial class, the financial implications of which, the court remarked, could not be more serious.
The court questioned why a trustee would allow the wife of the settler of 23 years, and the mother of one of his children, in her late sixties and with no other means of support, to be put in that position of uncertainty when it was the settlor’s clear intention as per his letters of wishes that she should be supported by the trust that holds all the family assets.
The court could find no good reason for not appointing B immediately as a beneficiary in her own right, and found that the trustee had every good reason to do so, namely, to secure her position within the beneficial class of the settlement. The court further found that B’s need to be in the beneficial class in her own right, far outweighed the interests of the other beneficiaries in allowing the current uncertainty as to her status to continue.
The court considered that test for intervention is high, but even so, it concluded that the decision of the trustee not to appoint B as a beneficiary in her own right was a decision that no reasonable trustee would make. In the court’s view, the only reasonable decision would have been to appoint B as a beneficiary in her own right.
The trustee’s decision was set aside, and, although the court did order the trustee to add B as a beneficiary, it did make it clear that the trustee was expected to do so without delay or the need for the court’s further intervention.
Surrender of discretion
A substantial portion of the judgment deals with the court’s consideration of what decision it would have reached had the trustee surrendered its discretion to the court. The trustee had not surrendered its discretion, and the court noted that the test for intervention is not that it would have reached a different decision to that of the trustee.
Even so, the court considered at length the decision it would have made, and indicated that, had the trustee surrendered its discretion to the court, it would have appointed B as a beneficiary in her own right for the following reasons –
- The settlement controlled the means by which B and C were and are supported financially, C having settled all his free assets on the settlement 15 years into the marriage;
- B’s status as beneficiary is of vital interest to her as the marriage has broken down, and the settlement is her only means for support or by which any order of the Matrimonial Court against C can be met;
- The prospect of C dying before the final divorce order is made is very real in the court’s view, and it is unlikely that the trustee in such a case would cease to support B. The trustee would likely appoint B as a beneficiary in her own right in such a case.
- The trustee’s decision unnecessarily leaves B in a state of uncertainty, which, to the court’s mind, is not appropriate treatment of the wife of 23 years and the mother of one of the settlor’s children.
- There is no disadvantage to the other beneficiaries in B being appointed as beneficiary in her own right.
- The advantage to the other beneficiaries were B not to be appointed as a beneficiary in her own right cannot be properly balanced against B’s interest.
- From the other beneficiaries’ perspective, B is being supported by the settlement and will continue to be supported after she ceases to be the settlor’s wife (whether by divorce or death), and for this purpose, she needs to be a beneficiary in her own right. The court could see no good reason not to confirm that status now.
The considerations stated above seemed to have contributed to the court’s finding that no reasonable trustee would have made the decision which the trustee made in this instance.
It will be interesting to see whether this decision will go on appeal. The court seems to have considered the legal position correctly, referring to the judgment in S v Bedell Cristin (also reflected in Lewin on Trusts), stating that –
the mere fact that the court would not have acted as the trustees have done is no ground for interference’, and ‘the court cannot overturn a decision of a trustee which has not surrendered its discretion to the court, merely because the court would have reached a different decision. It may only intervene where the decision is one which no reasonable trustee could arrive at.’
Although the court starts by setting out this position, it veers off into considering what it would have decided had the trustee surrendered its discretion. One cannot help but wonder to what extent this consideration, which should ostensibly be irrelevant, impacted the court’s finding that no reasonable trustee would have made the decision the trustee had made.
The court also seems to have difficulty in removing the issue of justice between B and C from its mind, even though it expressly stated that it is not concerned therewith. One of the reasons the court seems to give for its decision is that B was the wife of the settlor for 23 years and the mother of one of his children, and therefore she should be treated better by the trustee. (The court did however in the same breath emphasise that the settlor’s intention that B should be supported by the settlement, was clear.)
Be that as it may, this case does serve as a stark reminder to trustees on the importance of taking all relevant considerations into account when making decisions affecting the beneficiaries’ interests, and to carefully record these considerations as well as the reasons for making the decision it does. Furthermore, it highlights the importance of the settlor’s letter of wishes, and raises interesting questions around the trustee’s duty to consider the wishes of the settlor where those wishes might have changed.
We live in unprecedented times and no matter your stance on the appropriateness of lockdown, it is undeniable the COVID-19 pandemic has forever altered the workplace.
The office environment has been impacted by a fluctuating definition of essential work and a risk-based approach to distancing, but defining this era will undoubtedly be the sudden and global shift to working-from-home culture. Historically a privilege, now self-regulating work is afforded to all, raising unprecedented risks to client data protection.
Many data protection policies were traditionally created on the premise that computers, files and documents remain in the office. However now, with working-from-home requirements, data is routinely sorted, accessed and processed at the homes of employees.
Despite best efforts, it is difficult to eliminate all data exposure when documents are in transit or removed indefinitely. According to the relevant law, the measures required to safeguard against data breaches must be proportionate to the nature of the risk. With almost all employees now relocating data, a review of what is proportionate is essential.
Data breaches can now occur in the most unremarkable of circumstances – a shared workspace between domestic partners, private client data left in a communal space by cohabiters, or a laptop unattended and unlocked in the home. Most offices have a safe disposal method for sensitive and personal documentation, which employees don’t have access to while working from home.
Often data protection policies are silent as to the measures to be followed by employees when working from home, even on basic considerations such as the documents that an employee is allowed to take home or print at home, how such documents are to be kept safe and eventually disposed of, or how office equipment such as laptops and computers are to be safeguarded from unintentional data breaches. The safety of data and equipment in transit, particularly where employees are taking laptops with them while travelling, should also be addressed.
Even if an employee’s home is a safe space, the employer must be able to illustrate how it is keeping its clients’ data secure and, should a data breach occur, be satisfied that it is unlikely to have occurred due to its own (or its employees’) negligence.
It appears that with the world continuing to shift further towards distanced working as the norm, considerations of data protection in this context are ripe for review.
Certain fundamental risks should be addressed in the company’s data policy to guide and regulate employees working from home. However, every company policy is different and each employer will discover its own challenges with more employees working from home. Each data policy should therefore be fluid and regularly reviewed to sufficiently address these evolving challenges.
If you would like advice regarding your data protection policy, please contact us.
As the world navigates the challenges of COVID-19, demand for technologies such as electronic e-signatures is increasing significantly. As clients, businesses and public organisations implement home-working protocols in response to working from home guidance, flexibility in remote contract signings is becoming critical.
Regardless of current circumstances, electronic signature systems are widely used across the world especially in the context of business continuity and remote working, as well as enabling businesses to remain engaged with a range of (now remote) stakeholders including customers, suppliers and employees.
With the increased use of electronic signatures, we need to rethink the risks involved and our approach to seemingly routine procedures.
What does Jersey law say?
The primary legislation in Jersey is the Electronic Communications (Jersey) Law 2000, as amended in October 2019 by the Electronic Communications (Amendment of Law) (Jersey) Regulations 2019 (the “Law”).
An electronic signature under the Law is defined as: “a signature in electronic form attached to or logically associated with an electronic communication or electronic record”.
The Law stipulates that a person required by an enactment to provide a signature can meet that requirement electronically, and gives guidance on how the electronic signature should be provided. However, the Law does not contain a similar provision for commercial transactions (where an enactment does not require the signature).
Authority for the acceptance of an electronic signature in Jersey law might be found in article 2 of the Law, which stipulates that information shall not be denied legal effect, validity or enforceability, solely because it is in electronic form. ‘Information’ is defined to include data, text, sounds, images, codes, computer programs, software and databases. Although not expressly included, we would argue that an electronic signature would constitute information as defined.
In any event, the Law further provides that, in the formation of a contract, offer and acceptance may be expressed by means of electronic communication.
The details stipulated for the electronic signature required under an enactment, although not applicable to commercial transactions, are instructive:
- The method of signature used must identify the person and indicate the person’s approval; and
- The method of signature used must be as reliable as is appropriate for the purposes for which the information is communicated.
What are the commercial considerations?
- Does the company’s constitutional documents allow for electronic signatures? If signing on behalf of a Jersey entity, you should check its constitutional documents to ascertain if electronic signatures are permitted – or at least not prohibited – on behalf of the entity, and for any requirements that an electronic signature must satisfy.
- Are you authorised to sign and apply your electronic signature to the document? If so, you should be the one to insert your name or signature electronically (i.e. do not authorise someone else to this on your behalf). You should also be the person who sends the electronically signed document from your own email address that identifies you by name to the other parties.
- Does the corporate authorisation allow electronic signature or specify the method of electronic signature? The relevant corporate authorisations must also be checked: the best practice will be for them to expressly refer to electronic signature of such document including the particular method of signature.
- What does the agreement say? Is there anything in the contractual terms of the document(s) to be signed that prohibit electronic signatures? Does the agreement stipulate the method of electronic signature?
- What does the law regulating the agreement say? Does the law regulating the agreement (if not Jersey) permit electronic signatures and doesn’t otherwise contain restrictions on the type of document that can be signed by way of electronic signature?
- What is being signed? What method of electronic signature would be appropriate for the type of document being signed? Is the addition of a jpeg image sufficient for the kind of document being signed and the level of risk involved? Where electronic signature technology is being used, is the standard level of authentication offered by such methods as DocuSign or other similar platforms of electronic signature appropriate? Or should additional and more resilient levels of authentication, such as SMS authentication, PIN Numbers or passwords, be considered?
- Do all the parties need to sign in the same way? Unless the agreement provides otherwise, not all parties need to sign using electronic signatures. Some parties can sign in wet ink while others sign electronically; however, the original executed document will have to be compiled of the counterparts of each party’s signed document.
- Does the document need to be witnessed? If a Jersey power of attorney is to be granted by a natural person who is to execute by electronic signature, a revised direction of the Royal Court of Jersey stated that witnessing by video conference is acceptable, subject to the conditions and caveats set out in that direction. In the case of a company whose articles of association require its sealing, or signing to be witnessed, a witness must be physically present at that signing or sealing. It may be worth considering an amendment to such articles to remove any requirement for sealing or for signing to be witnessed.
- Have the parties agreed on the signature process? Thought should be given not only to the mode of electronic signature, but also the process of signature. For example, whether it is sufficient for a signatory to return the signature page only, or the executed signature page together with the agreed form of the agreement, and does the conformed copy of the agreement need to include the whole document returned by each signatory, or can the conformed copy consist of the original form of agreement with each signatory’s executed signatory page?
It is important to determine early in the process of any commercial transaction how the parties intend to sign, including the process to be followed. The parties may want to include specific provisions in the agreement for the method and process of signature, including a limitation of the risks involved. Now is the time to update old boiler-plate signature clauses, and ensure that the necessary processes are in place to protect your company’s interests.
Contact us if you need to review your standard agreements or need further advice.
Must Read: How the 2021 tax law amendment will affect South African emigration and retirement funds.
Access to South African retirement funds will become a factor of tax residency instead of exchange control residency.
TAKEAWAY: A client planning to emigrate from South Africa should cash-out their current pension fund if they want to access the funds within three years of leaving the country; if your client has been living abroad for more than three years already, then they may be eligible to cash out their retirement funds now. Keep this in mind when the client wants to add their pension funds to the trust fund.
What is changing?
One of the benefits for a South African to emigrate for exchange control purposes (often referred to as ‘financial emigration’), is access to their retirement funds.
Although a person can access 100% of their current pension fund upon the termination of employment, any previous pension funds held in a pension preservation fund or retirement annuities, are inaccessible until retirement age, or until formal exchange control emigration.
The recent taxation laws amendment bill proposes to do away with the exchange control emigration as a mechanism to get access to one’s retirement funds. Instead, the new requirement to access retirement funds will be that the person has ceased to be a South African tax resident, and has remained tax non-resident for at least three consecutive years.
There is a short window to still make use of the exchange control emigration route though: if the exchange control emigration application is submitted before 28 February 2021 and approved before 28 February 2022, a person would be able to access his retirement funds.
What does this mean?
For many South Africans already living abroad, this will be a welcome relief, as they would possibly already be tax non-resident in South Africa. As a result of the amendment, they would be able to access their retirement funds as soon as they have been tax non-resident for three consecutive years after 28 February 2021.
For any South Africans planning to leave South Africa within the next year, this might be unwelcome news as, after 1 March 2021 they would need to wait three years to access any pension preservation fund or retirement annuity, unless they submit their exchange control emigration application before 28 February 2021. However, 100% of their current employer’s pension fund (as opposed to a pension preservation fund or retirement annuity), is available as a lump sum, and can be transferred abroad through the correct process.
The caveat? Tax. Even if tax non-resident in South Africa, a retirement lump sum withdrawal would be subject to tax in South Africa. In addition, a higher tax rate applies to withdrawals made before retirement age.
What do you need to know now?
Any person contemplating emigrating from South Africa in the future, may want to consider transferring his current pension fund to the new employer’s pension fund when moving between jobs, instead of transferring the pension fund to a preservation fund, in order to access the pension fund in full when leaving employment to emigrate.
For more information on South African tax and exchange control residency, read our briefing note here. For assistance in helping your clients plan their emigration, or transferring their retirement funds to the trust, contact us.
(UPDATED: 2 December 2020)
The Big Debate: Are trusts required by SA law to pay interest on any outstanding loans to SA lenders?
We have seen much confusion on this important topic and here we hope to provide some simple answers to help you navigate this question.
TAKEAWAY: A popular way of financing a trust from South Africa is to sell assets to the trust and leave the consideration outstanding as a loan, or to loan funds to the trust. There have been many changes to the treatment of no interest or low interest loans for South African tax. Many now insist on charging interest, but this is not the only answer.
Is a trust required to pay interest on a loan owed to a South African person?
No. There is no requirement that a loan owed to a South African lender should be interest bearing. However, where interest is not charged, or charged at a low rate, certain anti-avoidance measures will apply. Depending on the circumstances, the interest not charged will be subject to donations tax in the hands of the lender (the ‘deemed donation provision’), or the lender will be taxed as if interest was actually charged (the ‘transfer pricing provision’). Therefore, the law does not require interest to be charged, but provides for certain tax mechanisms where interest is not charged at a market-related rate.
Where the deemed donation provision applies, the deemed donation is the difference between the interest charged and the official rate of interest (a defined rate in South Africa).
For example, assuming a loan of £10 million, with zero interest, and an official rate of interest of 4.5%, the total donation for the year will be:
£10 000 000 x (4.5% – 0%) = £450 000
Donations tax is levied at 20% of the first R30m (about £1,5m) of donations per year, and 25% thereafter. Assuming that the lender made no other donations that year, the lender will pay donations tax of £90,000 for the year on the interest not charged.
Where the transfer pricing provision applies, the tax legislation deems interest to have been charged. However, where the transfer pricing provision applies, the deemed donation provision cannot also apply.
For example, assuming a loan of £10 million, with zero interest, and a market-related rate of interest of 4.5%, the deemed interest for the year will be:
£10 000 000 x (4.5% – 0%) = £450 000
The lender is deemed to have received £450 000 of interest income for the year. Income tax in South Africa is charged on a sliding scale of 18% – 45%. Assuming that the lender is subject to the marginal tax rate of 45%, the lender will pay income tax of £202 500 on the deemed loan interest for the year.
It is important to note that, in addition to the deemed interest or transfer pricing provisions, attribution provisions may apply to tax the income of the trust in the hands of the lender where interest is not charged at a market-related rate.
What happens if interest is charged?
Where the South African lender charges interest on the loan, the interest payable by the trust, whether actually paid or not, is income accruing to the lender. This interest income is subject to income tax in South Africa.
Assuming a loan of £10m and a market-related rate of interest of 4.5%, the interest income for the year would be as follows:
£10 000 000 x 4.5% = 450 000
Assuming that the lender is subject to the marginal tax rate of 45%, the lender will pay income tax of £202 500 on the loan interest for the year.
The great equaliser: estate duty
Depending on the circumstances, the tax for the lender in any year could be the same regardless of whether interest is charged,. Not charging interest brings the anti-avoidance provisions into play, which can be complicated. Why would a person then choose to not charge interest on a loan?
While the year to year cost for the lender may be the same, the big difference comes in on estate duty. When interest is not charged, the value of the loan remains stagnant and the estate duty on the loan does not increase. However, where interest is charged, the value of the lender’s estate increases year by year (either with the value of the loan increasing as interest accumulates, or in the lender’s personal estate if the trust actually pays the interest). This results in an additional cost of 20% or 25% at death, depending on the lender’s estate value, on the interest accruing each year.
As the estate duty is only payable at death, this hidden cost is often overlooked, even though it can place a substantial burden on the lender’s estate. In our example above, over a period of 20 years the estate duty effect where interest is charged can be £1,8 million to £3,5 million. In comparison, the estate duty effect of not charging interest is £0.*
The bottom line?
There is no requirement to charge interest.
- If interest is charged, it is necessary to consider both the annual income tax cost as well as the estate duty effect at death on the growing value of the loan.
- If interest is not charged, the tax legislation will deem interest to have been charged, or a donation to have been made. When considering the total cost of this option, it is necessary to also take into account the attribution rules which taxes (some) of the income in the trust in the lender’s hands.
It has been our experience that, depending on the circumstances of the planner and his family, it may be the more cost-effective option, for a tax perspective, not to charge interest.
However, tax is not the only consideration when making this decision. It is merely one of the consideration when deciding on how the funding to the trust should be structured. Our view is that the holistic cost and implications of all options should be considered before making such a weighty decision, and we would advise any person to take advice in such a case.
Contact us should you wish to review the loan arrangements of the trusts you manage.
* The estate duty on the initial loan value being the same between the two scenarios.
We are often asked by offshore trustees how they can expand their business in South Africa. The answer is quality service, especially around the following few important considerations which we touch on here.
Anticipating reporting needs
The South African tax year runs from 1 March to the last day of February of the following year. South African beneficiaries need to declare whether they have received a distribution from any trust, and a South African financier may need to declare certain income of the trust in their tax return, even if it did not accrue to them. Offshore trustees therefore, need to be sensitive to the reporting requirements of their South African beneficiaries and funders.
Offshore trustees may, for example, want to consider whether a reporting period of 1 March to the last day of February is not perhaps more appropriate than a January to December period, where the primary reporting obligations arise in South Africa.
A South African beneficiary needs to declare any distribution received and disclose what portion of the funds received is paid from interest income, dividend income, capital gains (calculated based on South African rules), or original capital (the amount settled on the trust).
Making a distribution, and then leaving the beneficiary in a lurch as to the nature of the funds, may result in the total amount being taxed as interest income, even if the whole amount consists of original capital. This is important, as the marginal tax rate for interest income is about double that of dividends or capital gains tax, and no tax is payable at all on distributions paid from original capital.
We would recommend that any trustee be proactive and plan distributions together with the beneficiaries. Ideally, distributions should be planned at the start of each year and be made from income, leaving the original capital available for making unplanned or emergency distributions tax-free.
As original capital can be distributed free of tax in South Africa, accurate records of the capital in the trust should be kept. When a distribution is made, the trustee should record the amount that is being paid from original capital. The trustee should have a clear record of the original capital of the trust (all settlements received), the distributions made from original capital, and the remaining balance of original capital.
In such a way, the trustee is helping to protect the trust funds distributed from unnecessary tax, as the South African tax authority will tax original capital as income – potentially at 45% – if it cannot be proved that the distribution was made from original capital.
TAKEAWAY: A trustee insensitive to the South African beneficiary’s reporting needs, can wipe away 45% of the value of the trust funds distributed by not keeping the necessary records. No amount of careful investing can make up for that. On the other hand, at minimal cost to the trustee, the value of the trust fund on distribution can be protected and maximised for the South African beneficiary by good record keeping.
Using income to settle the trust’s costs
Another way a trustee can easily increase the value of the trust fund for a South African beneficiary, is to pay the trust’s costs – including trustee fee – from income. In preparing the accounts for the trust, the trustee can show that the trust’s costs are settled first with interest income (current or accumulated), then from dividend income, then capital gains, and lastly from original capital. This ensures that the highest-taxed funds are used for costs, leaving the lowest taxed funds available for distribution to beneficiaries.
It is small considerations such as these which add immense value to the South African client and sets the offshore trustee apart from its competitors.
We are happy to provide complimentary training to teams working with South African clients or beneficiaries; please contact us if you are interested.
Guest article by Lindsay Bateman of Brooks Macdonald
28 September 2020
South African resident clients today can internationalise their wealth through specific exchange control concessions, meaning such individuals can apply for an annual allowance of ZAR10m per calendar year, a far greater and more flexible scenario than was the case some years back. With the right advice and support from their trustee, or independent advisor, they can apply for a “tax clearance certificate”, production of which at their local bank will facilitate the external transfer of these funds to their trustee to position with their selected offshore asset manager, in their agreed and risk aligned international investment strategy. Such certificates are valid for a twelve-month period from date of issuance.
Today’s world is ever more challenging as the impact of Covid-19 continues to disrupt economies, lifestyles and earning power, and South Africa is by no means an exception. Because of this, the benefits of true international wealth diversification for South Africans is being increasingly recognised by clients and trustees alike.
South Africans investors seek out good quality, regulated and experienced advisors and trustees that understand both the South African and international implications of their intended investment path, and the use of tailored structures to hold fixed property, investment portfolios, intellectual rights and other assets remains a well-trodden path.
Trustees pay attention to several key factors when selecting a suitable investment strategy and provider, which include the following:
- Investment provider: Are they reputable, established, independent, regulated in both their own jurisdiction and in South Africa? Are they of sufficient size in terms of assets managed and investment managers employed to provide substance and continuity, offer a range of suitable investment services, travel to SA regularly to meet clients and have deep knowledge & experience of both the SA and international investment and regulatory frameworks?
- Counter-party risk: Is the trustee placing full reliance on the investment provider’s balance sheet, or does the investment firm “ring-fence” client assets and place them with a large highly rated global banking group as nominee?
- Investment services: Are these accessible in terms of minimums, offer transparent and competitive all-in fee levels, provide a range of currency options (USD, GBP and Euro)? Do they offer a range of risk profiled investments from very cautious to growth orientated mandates, provide daily liquidity, and cater for any short-term unexpected redemptions without penalty or delays?
- Relationship support: Is online access in place for both the trustees and if required, the underlying client? Will the investment manager meet the clients in SA alongside the trustees, or on request, to conduct regular portfolio reviews? How easy is it to contact the investment manager to get information provided, SA tax reporting as may be required, or other statements, valuations and performance reporting? Can this reporting be tailored to meet the specific needs of the trustees or clients? Is a dedicated team in place at the investment firm with clear experience and knowledge of the region, and a commitment to ongoing and regular travel?
South Africans are besieged with offers to “invest” internationally, with some exploiting the demand for such opportunities by offering highly attractive sounding returns and often exotic and complex investment strategies. Trustees can help protect clients from themselves in such cases, and through their role to protect and grow assets for the beneficiaries of the trust, ensure that the best possible investment manager, strategy, risk profile and ongoing investment returns are all in play. It is often only in the long term that clients realise and appreciate the powerful benefits that can be delivered through a quality trustee working hand in hand with an independent, regulated and experienced investment manager.
Hatstone Lawyers has been named by eprivateclient as one of the world’s top private client firms in its 2020 Top Offshore Law Firm rankings.
The rankings are based on a survey of over fifty leading private client firms. They recognise the success of Hatstone’s fast-growing team of partners, lawyers and other professionals in the BVI, Jersey, London, Panama and South Africa, in providing outstanding legal, fund administration, trust and corporate services to private and corporate clients across the globe.
Group Partner, Simon Vivian said: “We are delighted to be recognised by eprivateclient. Our clients consistently tell us how much they value our global team’s pragmatic and timely advice to guide them through the complex legal and corporate challenges of managing transactions and assets across multiple jurisdictions. We are a young and dynamic firm, but we have a wealth of experience across all areas of offshore practice and deep relationships with other leading firms around the world. It is very pleasing to see this recognised as we continue to develop the compelling offering for our clients which eprivateclient has recognised.”