Issue: June/August 09
Tax issues concerning Beneficiary Funds
Manager: Absa Trust Beneficiary Fund & Employee Benefit Trusts Marketing
The beneficiary fund has been launched and trustees by now know most of the ins and outs of the procedures and would have had training on what they need to know about the beneficiary fund.
However, Cathy McClune of Absa Trust Beneficiary Fund says she has noticed that some confusion has been created in the marketplace by the approved benefits and the unapproved benefits. Trustees are sometimes unclear about which funds are approved and which are unapproved. In the main, approved funds are those that have been registered and approved by the FSB. These would normally be the Pension, Provident and Retirement Annuity Funds.
Unapproved funds would normally be group schemes, like the group life and disability schemes. However, some group schemes are incorporated into the rules of the approved fund and are then classified as an approved fund. Therefore, trustees need to ensure that they are aware of what status their funds enjoy so that they can deal with each appropriately.
Once trustees know the status of their fund, they would then know that if it is an approved fund, the amount allocated to a minor beneficiary will go to the beneficiary fund and if it is an unallocated fund, it still goes into an umbrella trust.
Another area of concern relates to tax issues. Now that the first R300 000 of the death benefit is tax-free and monies paid into a beneficiary fund are taxable in the hands of the beneficiary, trustees are faced with a slight dilemma.
When the amount to be transferred to the beneficiary fund is a large amount, for example more than R200 000, then the tax payable at termination could be relatively high. On R200 000 the tax payable would be R18 000 at the current tax scales.
However, trustees must remember that for the years the amount was in the beneficiary fund, the beneficiary received a monthly income that was not taxable, due to the annual income paid being less than R54 200 (in most cases) and that the money was being managed for the benefit of the beneficiary.
Should the full amount have been paid to the guardian of the beneficiary, the income from the funds would most likely attract tax due to him/her being in possession of other sources of income. Plus, the amount over R300 000 payable to the spouse would have had tax deducted.
The paying over of funds to the beneficiary fund for a beneficiary is still the most viable option due to the protection of the assets as well as the tax relief that is offered to the surviving spouse.
Should any trustee wish to discuss these matters further, you can contact Cathy McClune of Absa Trust to do a presentation to your Fund.