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Taxation of trusts

Publishing Date : 03 February, 2020


Death and Taxes; the 2 certainties in life they say. Certain that the other twin (tax) will even follow a person unto death, inseparable huh? There are cases where children receive property upon death of parents and are left with huge liabilities because they do not have means to settle the tax liability, some may be unemployed or under employed leading to them losing such property to get out of trouble with the tax man.

Like fate would have it, in planning for taxes when one passes away there are instruments that can be entered into to ensure that when leaving an estate for loved ones, taxes are accounted for without getting the loved ones in trouble with the tax authorities. The use of a trust is one such avenue, trusts can be used to hold assets on behalf of the beneficiaries and the trust holds such property until the beneficiaries attain a certain age or when you pass away.

The Income Tax Act includes settlement, wills and deeds of donation among trusts for tax purposes. Any income whether business or otherwise will be taxed in the hands of the trustee if not distributed to beneficiaries. In a case of death where such trust was holding property and the trust bestowed such property to beneficiaries listed in the trust there won’t be any tax liabilities accruing like capital gains as the property already belonged to the beneficiaries just that they were being taken care of through an instrument.

Where there is no such arrangement upon transfer of the property, capital gains will arise from the deemed disposal of the property even though there was no income received. For trusts that earn business income, where such income is distributed to the beneficiaries it will be taxed in the hands of the beneficiaries and if they are minors it will be in the hands of the settlor.

Sometimes settlors (owners or founders of the trust) injects cash into the trust to help with starting the investment process where the trust is to generate income. The intention most of the time is to recover this amounts at some point when the business of the trust is well established. These amounts often result in more tax liabilities for the trust or the settlor as they are interest free and the authority may want to claim Capital Transfer Tax from the trustee as there won’t be any agreement in place of when the amount is payable and how much is payable.

Therefore, it is important at the beginning to be clear on whether the amount starting the trust is a loan or donation to the trust so that any tax implications are sorted early and interest charges are avoided. For income tax trusts are subject to tax using the same rates as for non-resident individuals and are taxable on the first thebe. The rates range from 5% (less than P72, 000) to 25% (greater than P144,000). Capital Transfer Tax rate is 12.5% on donations received.

Returns for trusts are filed 4 months after the end of the financial year while for some same time as individual tax returns in September. Interest for late payments is 1.5% per month while penalty for late submission of the return is P100 per day. It should be noted that only trust that generates business or investment income may register for income tax while those receiving donations or injections from the settlor may register for capital transfer tax only.



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