Last week we spoke about tax issues that could arise when you attempt to
divert your income to someone else by donating income-generating assets to
him or her.
This involved both minor children and other people.
This week we`ll chat about minors specifically. These issues are covered in
Part 14 of your tax return. You will realise that most sub-parts of Part 14
refer to a ``minor child`` and require you to explain commercial
transactions, not only those that pertain to you, but to your minor
children as well.
The reason for this is that, in the past, tax evaders were diverting income
which accrued to them to their minor children who were paying tax at a
lower tax rate (because the first rand of taxable income in excess of your
rebates is taxed at 19 percent and the tax rate progresses to 42 percent
the bigger your wallet becomes) and effectively increasing the after-tax
income of the whole family.
It`s important to appreciate some of the reasons why the Receiver of
Revenue specifically wants to know about certain transactions between
yourself and your minor children on the tax return.
Parents used to donate ``gifts or presents`` (such as large amounts of money
or even businesses or other income-generating assets) to their children.
The whole thing was a ploy designed to avoid the income or the profits from
those assets (it could be interest from fixed deposits, for example).
In most cases parents would create trusts and name their minor children as
beneficiaries to benefit from the profits made by those trusts in which the
income-earning assets were included.
Now, there are specific sections in the Act that state that whatever income
is received by your minor children as a result of your donation of
income-generating assets to them will effectively be seen as your income
and subjected to a tax rate that takes into account all your other income -
likely to be higher than the tax rate your minor child would pay.
And it does not end there. Even if you donate assets to someone (even if
it`s not to your child) and you still have a current or future interest in
the assets donated, you will carry the tax burden on the income derived.
Furthermore, the use of trusts has been less attractive as you can no
longer use the losses from those trusts to reduce the income that you made
from other sources.
Any losses will be trapped in that trust, which means that if the loss from
the trust is, say, R10 000 but you had a taxable profit of R8 000 from your
other business, that profit will not be reduced by the loss from the trust.