Trust as a B-BBEE vehicle? Why not?
A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary.
An ownership trust is a legal arrangement in which an individual, called the trustor, transfers ownership of assets or property to a trustee. The trustee holds the property for the benefit of the trusts beneficiaries, who have a right to receive the trusts income or to access its assets according to the terms specified in the trust agreement.
The trust agreement outlines the rights and responsibilities of the trustee, the beneficiaries, and the settlor, and it governs how the trusts assets will be managed and distributed.
Ownership trusts can be used for a variety of purposes, including estate planning, tax planning, asset protection, B-BBEE and wealth management. They are often established to manage assets for minors or individuals with disabilities, or to provide for a person's family after their death. In some cases, ownership trusts may also be used to hold and manage real estate, shares, bonds, and other financial assets. It's important to note that the nature of ownership trusts can vary widely depending on the specific terms of the trust agreement and the jurisdiction in which the trust is established.
If you're considering establishing an ownership trust, it's a good idea to consult with a qualified attorney or financial advisor to ensure that the trust is structured in a way that meets your goals and complies with all applicable laws and regulations.
Trusts are commonly used for Broad-Based Black Economic Empowerment (B-BBEE) purposes. A B-BBEE trust typically operates as follows: the company transfers a portion of its equity to the trust, which is then managed by a board of trustees. The trustees hold the equity on behalf of the trust's beneficiaries, who are typically black South Africans. The beneficiaries have the right to receive a share of the trust's profits, but they do not have a say in the company's management or decision-making.
In addition to meeting B-BBEE ownership requirements, B-BBEE trusts can also serve as a tool for promoting skills development and job creation, and for supporting black-owned businesses and entrepreneurs. By providing access to capital and other resources, B-BBEE trusts can help to stimulate economic growth and promote broad-based economic empowerment in South Africa.
It's important to note that the use of trusts for BEE purposes is a complex area and subject to ongoing change, and companies should consult with B-BBEE experts and legal advisors to ensure compliance with all relevant legislation and regulations as there are several risks associated with trusts for B-BBEE purposes, including:
- Complexity: The use of trusts for B-BBEE purposes can be complex and subject to change, and companies must ensure that they are fully compliant with all relevant legislation and regulations. This can be challenging and time-consuming, especially for smaller companies with limited resources.
- Lack of control: By transferring a portion of their equity to a B-BBEE trust, companies may lose some degree of control over their operations. Trustees may have the right to vote on certain matters, such as major capital expenditures or changes to the company's business plan, which can affect the company's strategic direction.
- Lack of alignment: There is a risk that the goals and objectives of the company and the B-BBEE trust may not be fully aligned, leading to tension and conflict between the company and the trust.
- Limited ability to exit: Once a company has transferred a portion of its equity to a B-BBEE trust, it may be difficult to exit the arrangement. This can limit the company's flexibility and may make it more difficult to sell the business or raise capital in the future.
- Compliance risk: Companies must ensure that their B-BBEE trusts are structured and managed in a way that complies with all relevant legislation and regulations. Failure to do so can result in significant penalties, including fines and the loss of B-BBEE points.
- Reputational risk: Companies must also be mindful of the potential reputational risks associated with the use of trusts for B-BBEE purposes. If the trust is perceived as being insufficiently transparent or not in line with the spirit of B-BBEE legislation, it could harm the company's reputation and reputation in the marketplace.
The tax implications for the setup of a trust in South Africa are governed by the South African Income Tax Act No. 58 of 1962, as amended (the "Income Tax Act").
Some of the relevant sections of the Income Tax Act include:
- Section 1: This section defines the term "trust" and sets out the general rules for the taxation of trusts.
- Section 7: This section provides for the taxation of trusts as separate taxable entities, and sets out the rules for determining the taxable income of a trust.
- Section 25: This section sets out the rules for the taxation of trusts that are deemed to be "persons" for the purposes of the Income Tax Act.
- Section 26: This section sets out the rules for the taxation of trusts that are deemed to be "companies" for the purposes of the Income Tax Act.
- Section 27: This section sets out the rules for the taxation of trusts that are deemed to be "close corporations" for the purposes of the Income Tax Act.
- Section 28: This section sets out the rules for the taxation of trusts that are deemed to be "partnerships" for the purposes of the Income Tax Act.
- Section 30: This section sets out the rules for the taxation of trust income that is distributed to beneficiaries.
All the above are tailored based on the specific scenario and cannot be implemented without proper advice and consideration.
Ownerhsield specialises in the structuring of ownership for B-BBEE purposes including the tax effect on it. Contact us for more relevant information based on your current position.