Tax benefits of discretionary trusts : abolishment of the conduit pipe principle

Abstract

Trusts have long been effective and beneficial estate planning instruments for various reasons, amongst which their favourable flow-through nature (with special reference to applicable tax benefits). For purposes of estate planning this popular planning instrument is utilised to protect assets, contribute to succession planning and minimising tax liability for the estate owner, the trust itself and the involved beneficiaries. One of the most effective measures of obtaining tax benefits by means of a trust is through the application of the conduit pipe principle. This principle allows for income and capital to ‘flow’ through the trust to the beneficiaries while retaining its original nature. Application of this principle results in tax reliability to be shifted from the trust to the beneficiaries, who often, as natural persons, qualify for a variety of tax exemptions, exclusions and rebates. However, in recent national budgets the conduit pipe principle has increasingly been scrutinised due to the South African Revenue Service’s belief that it is being used to acquire tax benefits. After investigation of the taxation of discretionary trusts, the appointed Davis Tax Committee proposed the abolishment of the conduit pipe principle. This dissertation evaluates the effect that the abolishment of the conduit pipe principle will have on the taxation of trusts and their beneficiaries, as well as the ultimate effect thereof on the popularity of discretionary inter vivos trusts for the purposes of estate and tax planning. The research goal is attained at the hand of a literature study on the objectives of estate planning, specifically tax minimisation by means of trusts and the conduit pipe principle. Various case laws are examined together with the applicable and relevant legislation in order to determine the current tax benefits of trusts. In conclusion a case study is conducted to evaluate the tax benefits of a trust with the application of the conduit pipe principle and an evaluation of the future taxation of trusts, should the conduit pipe be abolished as proposed by the Davis Tax Committee, is given.