UESTION ONE (35 MARKS)

Question

Below is an income statement of the inter-vivo trust created by Betty Smith who donated all the assets to the trust. In terms of the trust deeds, Xavier Smith is entitled to an annuity of R240 000 and Yolandi is entitled to 50% of the net income remaining after the payment of annuity. The balance of the receipts and accruals shall be paid out to Xavier upon Yolandi’s death. Should Xavier die before Yolandi, the balance of receipts and accruals will be paid to Yolandi. Xavier and Yolandi are both majors and residents of South Africa. All taxpayers are younger than 65 years of age.
Income statement of trust
DR CR

Trust remuneration R48 000 Rent R480 000
Property expenses R164 000 Interest R320 000
Annuity to Xavier R240 000 Dividends from south africa R160 000
Share of net income Yolandi:
50 % of R400 000 R200 000
Surplus accumulated R200 000

You are required to:

Calculate the taxable income of all the relevant parties for the year of assessment and discuss the ethical risks likely to be encountered in this scenario

Answer 1

### Calculation of Taxable Income for the Year of Assessment

Let's break down the calculation for each party as well as for the trust.

#### Income Statement Breakdown:
1. **Total Receipts and Accruals:**
- Rent: R480,000
- Interest: R320,000
- Dividends from South Africa: R160,000
- **Total Income:** \( R480,000 + R320,000 + R160,000 = R960,000 \)

2. **Expenses:**
- Trust remuneration: R48,000
- Property expenses: R164,000
- Annuity to Xavier: R240,000
- **Total Expenses:** \( R48,000 + R164,000 + R240,000 = R452,000 \)

3. **Net Income to be Distributed:**
- Net Income = Total Income - Total Expenses
- Net Income = \( R960,000 - R452,000 = R508,000 \)

#### Allocation of Net Income:
1. **Annuity to Xavier:** \( R240,000 \) (already considered in expenses)

2. **Remaining Net Income after Annuity:**
- Remaining Net Income = Sickagenied R508,000 - R240,000 = R268,000
- Yolandi is entitled to 50% of R268,000 = R134,000

3. **Remaining Surplus:**
- Remaining Surplus = R268,000 - R134,000 = R134,000
- This surplus will be accumulated in the trust or distributed as per the trust deed in future.

### Taxable Income for Each Party:

#### Xavier Smith:
- **Annuity Received:** R240,000
- Annuity income is fully taxable under South African tax laws.
- **Taxable Income:** R240,000

#### Yolandi:
- **Share of Net Income:** R134,000
- **Taxable Income:** R134,000
- Yolandi must include her share of the net income in her own taxable income since she is entitled to it under the terms of the trust.

#### Trust:
- **Interest:** R320,000 (Income Generally Taxed in Trust's Hands)
- **Dividends:** R160,000 (South African Dividends are Usually Exempt in Trusts)
- Dividends received from South African companies are generally exempt from normal tax.
- **Expenses that can be directly deducted:**
- Trust remuneration (if not already expensed out of the results): R48,000
- Property expenses: R164,000
- **Remaining Surplus Accumulated in Trust:**
- Surplus to be retained in the trust or distributed in the future as per the trust deed.

Given this, taxable income in the Trust is generally calculated as follows:

\[ \text{Taxable Interest Income} = \text{Interest Received} - \text{Expenses that can be directly deducted} \]
\[ \text{Taxable Interest Income} = R320,000 - (R48,000 + R164,000) = R320,000 - R212,000 = R108,000 \]

#### Ethical Risks:
1. **Distribution Conflicts:**
- Potential conflicts between the beneficiaries if the distribution terms are not followed accurately. Ensuring fairness is crucial.

2. **Payment Delays:**
- Delays or mishandling in the payment of annuities or income shares can lead to disputes or financial harm to the beneficiaries.

3. **Transparency and Documentation:**
- Ethical risks arise from lack of clear records and transparent communication with all beneficiaries regarding the trust’s finances.

4. **Tax Compliance:**
- Ensuring that correct and timely information is reported to tax authorities is imperative. Misreporting or errors can lead to penalties and damage to the trust's reputation.

5. **Allocation Fairness:**
- Ensuring the fair allocation of expenses and income between the different taxpayers to avoid any biased treatments.

Ethical practices and adherence to tax regulations ensure that all parties involved are treated fairly and their respective interests are protected.