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Individuals as well as any other legal entity, namely Companies or Close Corporations can enter into a Partnership. This means that two or more individuals can enter into a Partnership, or an individual(s) can enter into a Partnership with a Company or two Companies can enter into a Partnership with each other.  Normally where two Companies enter into a Partnership, it is to work together to perform a specific job and at completion the Partnership is ended. This is usually a “joint venture”.

A Partnership is entered into simply by signing an agreement that is specifically drafted for the Partnership. Such an agreement has certain requirements before it can be called a Partnership Agreement and before one can say that a Partnership has been established.  It can be a verbal agreement as well. Apart from the South African Revenue Services, the Partnership does not have to be registered anywhere, like a Company, Close Corporation and Trust has to register at  CIPCO.

A Partnership is not a seperate legal entity, except for certain purposes.  A Partnership is established by partners signing or entering into an agreement and that is why it is not a legal entity. If one of the partners dies, the Partnership dissolves.  In fact, when anything in the Partnership changes then the Partnership comes to an end.  A new partner cannot be allowed into the Partnership.  If a new partner wants to join, the Partnership must be dissolved and a new Partnership agreement entered into. In terms of the Court rules a Partnership can be sued despite the fact that it is not a legal entity and for purposes of insolvency, a Partnership can be liquidated even though it is not a legal entity.


There are 5 requirements for a Partnership and they are the following:

a)    There must be an agreement between the parties to form a Partnership. The agreement must state that the relevant parties are entering into a Partnership with each other, by the signing of the Agreement.  (It is not a requirement that the Agreement is in writing, but it is always much better to have every agreement in writing.); and

b)    The parties must have the common goal to make a profit; and

c)    Each partner must make a contribution to the Partnership and such contribution must be unconditional.  This means that each partner must contribute either cash or labour or expertise and skills or some other intangible asset.  The Partnership Agreement will state how much of what each partner will contribute, for example:  Mr A will contribute R100 000 in cash and Mr B will contribute 30 hours of work per week working as a cashier.  The amount and nature of each partner’s contribution does not have to be the same – one can contribute less and another can contribute more in accordance with the next requirement, namely

d)    There must be a profit-sharing ratio.  This means that it must be clear what and how much profit each partner will get.  For example:  A will be entitled to 51 percent of profits and B will be entitled to 49% of profits.

e)    The Partnership  must be carried on for the joint benefit of the partners.



Partnership types can vary because the partners can make any agreement  with each other with regards to the workings of the Partnership.

There are two main types of Partnerships namely ordinary and extraordinary.  Extraordinary Partnerships are either anonymous or en commandite. Anonymous Partnerships are Partnerships where the partners’ names are not disclosed to outside parties (people who are not partners in the Partnership). This means that extraordinary partners are not disclosed to third parties therefore third parties don’t know about them.  The agreement between the partners in an Extraordinary Partnership will mean that the anonymous partner will only be liable towards the other partners as far as he must contribute either cash or labour or other assets and not toward third parties.

Extraordinary Partnerships that are en commandite  is also referred to a limited Partnership.  The reason for this is that the partner that is en commandite is only liable to third parties to the same extent that he has contributed to the Partnership and not more. This means that, for example, where Mr X contributed R100 000 to the Partnership and he will therefore only be liable for debt of the Partnership up to  R100 000 and not more.  The partner en commandite is also entitled to profits as determined in the Partnership Agreement.  Where a Partnership is en commandite, normally the Partnership is carried on in the name of only one partner and the other partner(s) are not involved in the day-to-day running of the Partnership. The other

Partner(s) are also not disclosed to outside parties.  The Partnership Agreement must be clear about these facts.

Ordinary Partnerships are the usual Partnerships where all the partners work and contribute to the Partnership together and are liable for the debt of the Partnership as per the Partnership agreement.

There are also what is referred to as Universal Partnerships.  This is where parties lived and worked together and shared income and/or assets but did not get married.  One can then argue that the parties formed a Universal Partnership, because the agreement between the parties, albeit silent, was one that complied with all five requirements of a Partnership. Read elsewhere in this article about the 5 requirements of a Partnership.

There is also a personal liability company as per Section 8 of the Companies Act.  In the old Companies Act these companies were called “Section 53 companies”.  These type of companies are professional Partnerships (attorneys, architects or engineers) and these Partnerships work together. The name of the firm is ended by the abbreviation “Inc”, for example Jones, Makalini Inc.  (The Inc stands for Incorporated”).  This type of company is in fact a Partnership althought it is called a company.  This type of company further allows for perpetual succession, meaning for example if there is a contract such as a lease agreement, the agreement can continue even if there was a change in the directors or shareholder of the company.  The partners of this type of company can change, it is not like normal Partnerships where the Partnership comes to an end when one of the partners dies.  Also, the directors and former directors of such a company are jointly and severally liable with the company for the debt of the company.  Once a director leaves, he is no longer liable for the debt of the company incurred after he left, but he will be liable for debt incurred by the company whilst he was in office.



To fulfil the requirements of a Partnership Agreement, partners have certain duties which are listed below:

a)    Each partner  must contribute to the Partnership what he/she should as per the Partnership Agreement – this refers to the cash/labour/asset/skill that each partner must contribute;

b)    Each partner must act in good faith towards other partners in accordance with a partner’s fiduciary duties.  The fiduciary duty of a partner means that each partner will not compete with the business activities of the Partnership.  This means that if, for example,  the business of the Partnership is an ice cream shop, partner A should not open an ice cream shop in his own name across the street. 

c)    Each partner must avoid conflicts of interest;

d)    Each partner must contribute to the losses of the Partnership in accordance with his/her liability as set out in the Partnership agreement;

e)    Each partner must act with the necessary care when he/she is busy with the affairs of the Partnership – this includes that assets of the Partnership should only be used for the benefit of the Partnership.


Partners obtain certain rights when the Partnership Agreement is in place. Some of the rights are the following:

a)    When the Partnership dissolves, each partner is entitled to a share of the assets of the Partnership in accordance with the Partnership Agreement;

b)    When there are profits in the Partnership, each partner is entitled to his/her share of the profits in accordance with the Partnership Agreement;

The above are two of the main rights that a partner obtains in a Partnership.  It is most important that it is clearly set out in the Partnership Agreement and what other rights and obligations are transferred to each partner.



It is very important that there is a written and signed Partnership Agreement.  If there is not one, it will be very difficult to determine what each party is entitled to or obliged to contribute or to do, as generally, if a Partnership ends for another reason than death, there is usually bad blood and the partners have different versions of what was or was not agreed upon.

It is also not advisable to “copy and paste” an agreement from the internet. Rather consult a professional who knows how partnerships work. Rather spend a little bit of money upfront to avoid problems later.



  • Your assets (including life policies) exceed R3.5m
  • Your assets consists of capital appreciating items
  • You have minor children
  • You want to control how / which assets are passed on to your heirs (especially in blended families)
  • You need asset protection planning


In South Africa, there are basically three types of trusts. These are:

  • living trusts (in South Africa called inter vivos trusts),
  • testamentary trusts and
  • bewind trusts.


Testamentary trusts are created at the winding up of a deceased estate following a specific stipulation in the deceased person's will that a trust must be set up. Testamentary trusts are usually created to hold assets on behalf of minor children, since minor children cannot in terms of South African law inherit anything (in the absence of a trust, assets from the deceased estate left to minor children are sold, and the money is paid to them when they reach adulthood).


Bewind trusts are created as trading vehicles providing trustees with limited liability and certain tax advantages.

There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times about how much each beneficiary is to benefit.




  • Trustees
    The trustees are the custodians of the assets in the Trust, but do not necessarily have an interest in the assets. In order to promote the independence of the Trust, it is advisable to appoint at least one independent trustee
  • Beneficiaries
    The beneficiaries are the individuals / entities entitled to benefit from the Trust assets or income
  • Donor / Founder
    Person setting up the Trust




The two main advantages of having assets in a trust are:

  • Asset protection (Protection of assets from creditors)
    In an ideal situation, since assets held by the trust aren't owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against the trust (there are exceptions). A common scenario of using living trusts for asset protection is a husband and wife acting as trustees along with a third unrelated trustee. The trust is granted a loan equal to the value of their assets, then the trust buys their assets using the loan, and finally the trust pays off the loan over time.
  • Continuity (A trust can span multiple generations)
    When any of trustees die, the trust and any assets owned by it, remain unaffected. Upon the death of a beneficiary, only the portion of the trust assets that vests in that beneficiary upon date of death would form part of the beneficiary's estate for estate duty purposes.




In terms of South African tax law, living trusts are considered tax payers. Two types of tax apply to living trusts, namely:

  • income tax – payable at a flat rate of 40% (individuals pay according to income scales), and
  • capital gains tax (CGT) – payable at the rate of 26.6% (individuals pay 13.3%).
  • estate duty – trusts do not pay estate duty (tax payable by a deceased estate). Trusts may be required to pay back outstanding loans to a deceased estate, in which the loan amounts are taxable with deceased estate.
  • The trust's income can be taxed in the hands of either the trust or the beneficiaries (a valuable tax planning tool).




Assets can be transferred into the living trust by:

  • selling it to the trust (through a loan granted to the trust) or
  • donating cash or other assets to it (any person can donate R100 000 per year tax free; 20% donations tax applies to further donations within the year).




  • Additional expenses:
    A trust is deemed to be a separate legal entity. As such, the following are required annually:
    • Annual financial statements
    • Annual income tax return
    • Bi-annual provisional tax returns
  • Administrative requirements:
    • Keep all records (first entry to financial statements) from inception of the Trust to at least 5 years after the trust has been deregistered
    • Trustees minutes and resolutions about all transactions to be drafted and retained
    • Maintain a separate bank account for all trust cash flows
    • Maintain asset register
  • Relinquishment of control:
    • SARS may deem income back to the donor of the asset if there is not adequate relinquishment of control over the asset
    • A court may look through the trust if there is not adequate separation of control between the trustees and the trust assets


    • If you would like to speak to someone about setting up a trust please contact us on 078 808 6972



Tax treatment for trusts


The Tax Rates for Trusts

Special trusts are taxed at the rates applicable to individuals. A special trust is one created solely for the benefit of a person affected by a mental illness or serious physical disability which prevents that person from earning sufficient income to maintain himself, or a testamentary trust established solely for the benefit of minor children who are related to the deceased. Where the person for whose benefit the trust was established dies prior to or on the last day of the year of assessment or the youngest beneficiary, in the case of a testamentary trust, turns 18 (2013: 21) years of age prior to or on the last day of the year of assessment, the trust will no longer be regarded as a special trust. All other trusts are taxed at the rate of 40%.


A loss incurred by a trust cannot be distributed to beneficiaries. The loss is retained in the trust and carried forward to the next year as an assessed loss.


Special Trusts

Trusts are often used by estate planners in planning for administrative and tax efficiency after the planner’s demise – and correctly so. However, a much overlooked vehicle is the “special trust”, which has all of the advantages of a ‘regular’ trust but with significant added tax benefits.

A “special trust” is a regular trust for all purposes other than the way it is taxed. The term ‘special trust’ is defined in section 1 of the Income Tax Act and are a vehicle to house the assets of a person with a serious mental or physical disability. But it is less widely known that there is another part to the definition of a “special trust”- namely a trust set up in terms of the will of a deceased person, solely for the benefit of ‘relatives’, the youngest of whom is under the age of 21 on the last day of February of the relevant tax year. The definition of ‘relative’ in the Income Tax Act includes anyone related to the person or his or her spouse to the third degree of consanguinity i.e. it includes great-grandchildren and nephews and nieces.

A special trust enjoys all of the benefits with regard to separation of assets and ease of administration that are afforded a ‘regular’ trust, however, instead of being taxed at the flat rate of 40 % on its taxable income a special trust is taxed on the same favourable sliding scale that applies to the taxation of individuals. It also enjoys the advantageous treatment afforded to individuals with regard to the rate of taxation on capital gains, which are taxed at a maximum effective rate of 10 % as opposed to 20 % in the case of a ‘regular’ trust.

It is implied by the definition of “special trust” that such a trust could only enjoy the added tax benefits until the youngest beneficiary turns 21. Thereafter the trust will be taxed on the same basis as a regular trust. Nevertheless, the tax benefits that could accrue during the period in which the trust is taxed as a ‘special trust’ can be enormous.


Take for instance the situation where a father, in his will, directs that on his death a trust be established for the benefit of (only) his children. He dies when the youngest of the children is four years of age. Such a trust would qualify as a “special trust” in terms of the definition above. He bequeaths R10m in cash to the trust. The trust uses the R10m to purchase a portfolio of shares. If the shares yield an 8% compound capital growth rate per annum, when the youngest child is 20 years old the portfolio will be worth R34.26m. If the trust were to sell the shares in that year and retain the gains, the savings in capital gains tax would amount to more than R2.42m, when compared to the tax that would have been payable had the trust been a regular trust. This is besides the savings in income tax over the period on dividends from foreign shares in the portfolio.


After the trust no longer qualifies to be taxed as a “special trust”, it does not have to be terminated – it can continue in existence as a ‘regular’ trust, without the special tax treatment outlined above. My advice is that serious consideration should be given to the use of a ‘special trust’ when doing any estate planning exercise. As the majority of laypersons are not versed in issues relating to the taxation of trusts, this is especially the case for those in the financial planning arena, where considering the appropriateness of a ‘special trust’ should be standard item on the due diligence checklist.



TAXATION OF TRUSTS IN SOUTH AFRICA (Interesting article from


Trusts have traditionally been a convenient tool for tax planning purposes. Even though it also provides the additional benefit of separating the assets of a taxpayer from an insolvency perspective, trusts also enabled taxpayers to potentially avoid estate duty and to reduce the effective rate of interest to the extent that income was diverted to lower income earners.


Even though the English principle of equitable ownership as distinct from legal ownership is foreign to South African law, the use of a trust was introduced in South African law through usage without specific legislative intervention. In Estate Kemp & Others v McDonald’s Trustee 1915 AD 491 it was for instance indicated: “The underlying conception in these and other cases is that while the legal dominium of property is vested in the trustees, they have no beneficial interest in it but are bound to hold and apply it for the benefit of some person or persons or for the accomplishment of some special purpose. The ideal is so firmly rooted in our practice, that it would be quite impossible to eradicate it or to seek to abolish the use of the expression trustee, nor indeed is there anything in our law which is inconsistent with the conception.”


Currently a trust is defined widely in the South African income tax legislation as meaning any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person.


Over a number of years the South African Revenue Service (SARS) started to shift its focus to the tax position of trusts and how the perceived tax avoidance can be curbed. A number of measures have been introduced over the years, resulting in the income of trusts currently being taxed at the highest rate applicable to individuals, being 40 percent in circumstances where capital gains are taxed at the highest effective rate applicable to any taxpayer, being 26.7 percent. No rebates are also claimable by a trust as opposed to rebates that can be claimed by natural persons from a tax perspective.


However, the fundamental basis pertaining to the taxation of trusts, being the so-called conduit or flow through principle, remained the same. This conduit principle has the effect that income and gains will flow through to the beneficiaries of a trust on the basis that the income would also have retained its character. For instance, in a South African context dividends are exempt from tax. Should dividends be vested in a beneficiary during the same year of assessment that it has accrued to the trustees, the dividends would retain their character in the hands of the beneficiaries and thus also be exempt. From a dividends tax perspective (being levied at the rate of 15 percent in respect of dividends received), SARS has also indicated that it will be the beneficiary that is deemed to be the beneficial owner of the dividends and thus liable for dividends tax to the extent that the beneficiary has a vested right to the dividends or in circumstances where the dividends may be vested in the beneficiary by the trustees during the same year of assessment.


There are two ways in which a beneficiary can obtain a vested right to income and/or the assets of a trust. In terms of a vesting trust the assets and income of the trust are vested in a specific beneficiary, who is then entitled by law to such income and/or assets. In terms of a discretionary trust, the trustees have the discretion whether and how much of the income or assets of the trust can be vested in a specific beneficiary on the basis that a beneficiary has merely a contingent right or so-called spesto the trust income or capital. It is especially the use of a discretionary trust that created a concern on the part of SARS as the trustees would effectively be offered a choice as to which taxpayer is liable for the income or capital gains of the trust. For instance, if the income or gains are vested in a beneficiary, the beneficiary would be liable for the tax. If no vesting takes place, the trust (as a taxpayer) would incur the tax liability even though it is not a legal person in a South African context.


In another attempt to curb the potential abuse associated with the use of trusts, it has been indicated that the conduit principle does not apply to losses or expenditure that may be incurred by a trust. Losses and expenses are therefore ring-fenced and a beneficiary can only claim a deduction or allowance to the extent that an amount has accrued to the beneficiary. Losses can therefore not be transferred to a beneficiary so as to shift the tax burden.


From a capital gains tax perspective a novel principle has also been introduced in the sense that it is possible to vest a capital gain (and not an asset) in a trust beneficiary who is a South African tax resident. It is therefore not necessary to vest an asset in a beneficiary, but the trustees can decide to protect the capital in a trust and only vest the capital gain in a beneficiary. In such instance the capital gains tax is to be accounted for by the beneficiary.


Over years the use of offshore trusts has also been the subject matter of legislative intervention. Essentially income and capital gains will be taxable in the hands of a South African resident to the extent that the resident acquires a vested right to the income or capital of a foreign trust in circumstances where the income or capital gains have not been subjected to tax in South Africa previously. To the extent that, in the context of capital gains, the capital of the trust thus arose from a capital gain or an amount that would have constituted a capital gain of the trust had the trust been a South African tax resident, the vesting thereof in the beneficiary would then result in a capital gains tax liability.


In the recent round of legislative proposals National Treasury indicated that a number of fundamental changes will be made to the taxation of trusts. Not only will the use of trusts to avoid estate duty be reviewed, but it appears that the use of trusts by high net worth individuals has not been targeted by the legislature. In particular, discretionary trusts will no longer act as flow through vehicles. The income, capital gains and losses of the trust will now be calculated at the trust level on the basis that distributions will be allowed as a deduction from a trust perspective to the extent that these distributions are funded out of current taxable income. The effect is that a separate calculation will have to be made to determine the tax position of a trust on the basis that distributions will be allowed as a deduction. To the extent that a beneficiary becomes entitled or receives a distribution, such distribution will be: (i) taxable to the extent that the distribution has been deducted by the trust; and (ii) tax free to the extent that no deduction has been made by the trust.

It is important to appreciate that capital gains will be converted into revenue gains on the basis that the distributions by a trust to natural persons will in future be taxed at income tax rates and not at capital gains tax rates, being 40 percent. A trading trust will also be taxed as a separate trust on the basis that distributions will be deductible by this type of trust. The trust will be regarded as a trading trust if it either conducts a trade or if the beneficial ownership interests in these trusts are freely transferable. In a further attempt to curb international tax avoidance, foundations will also be included under the concept of a trust. Distributions from offshore foundations will also be regarded as ordinary revenue and be taxed accordingly.


It is expected that substantial restructuring will take place in the context of trusts. In the process one should appreciate that donations to trusts will result in the donor being liable for the income or capital gains of the trust. An interest free loan is also regarded as a donation to the extent of the interest free element. It would therefore not assist a taxpayer to merely donate an amount to a trust (whether locally or internationally) as the income or capital gains will still have to be accounted for by the donor.






Will be published in February 2020.