Much is said about the necessity of building an investment portfolio to ensure a comfortable retirement. However, one of the first things to consider before implementing an investment strategy is whether you should house the investments in your own name or in a trust.

David Warneke, tax partner at Cameron and Prentice Chartered Accountants, says that in general, for growth investments a trust is preferable for a variety of reasons.

“Purely from a tax point of view, trusts have several advantages over individuals even though the 40% flat rate of income tax payable by trusts is higher than that of individuals, who pay tax on a sliding scale going up to a maximum of 40%. The most important advantage is the protection of growth in the underlying assets from the investors’ creditors.

“Other advantages are that in a discretionary trust, income and capital gains can in general be distributed to beneficiaries according to the wishes of the trustees. The vehicle effectively gives trustees a choice about in whose hands trust income and capital gains will be taxed and, if the choice is to leave income or capital gains in the trust, savings in estate duty will result,” says Warneke.

However, there are a number of caveats. First, it is imperative that the trust be set up and administered correctly. It is, for example, a requirement of the Trust Property Control Act of 1988 that a separate trust banking account be maintained. Second, the trust must be truly independent of the founder. Third, where the target of the investment is fixed property, it must be borne in mind that the rate of transfer duty payable by a trust is higher than that payable by an individual.

Warneke says where the investment is in rent-producing immovable property, the most important tax considerations are as follows.

First, there are no ‘safe haven’ rules like the three year rule which applies in the case of equities. Therefore, the longer the property is held the better in terms of warding off a challenge by SARS that a profit on resale is of the nature of income rather than capital.

Second, if the property is to be financed, it is normal that net rental losses are sustained in the early years. To be able to obtain the full benefit of these losses by offsetting them against other income, it is imperative that if the property is in the name of an individual, the individual must be able to demonstrate a ‘reasonable prospect of deriving taxable income… within a reasonable period’. This requirement can usually be substantially discharged by conducting a feasibility study before buying the property.

Third, you may deduct expenditure on repairs (as opposed to improvements) for income tax purposes. Improvements, in general, go towards the base cost of the property for capital gains tax purposes, says Warneke.

Where the investments are in equities, Warneke considers the most important tax considerations to be as set out below:

“First, it is best to hold the investments for a period of three years to be assured that gains arising on disposal are afforded the more favourable income tax treatment of capital gains rather than ordinary income.

“Second, dividends received from SA shares are exempt from income tax, but those received from non-SA shares are generally taxable (the latter are subject to a R3 700 a year exemption if the investor is a natural person). This also applies to dividends from investments in collective investment schemes (also known as unit trusts). With regards to EFTs, the treatment of the dividend is as above and depends on whether the underlying shares are SA or non-SA shares.”

“Finally, where the investment is in a bank fixed deposit or the money market, it may make sense for individuals to invest in their own name, as they can take advantage of the annual income tax interest exemption of R22 300 for natural persons under the age of 65, and R32 000 for natural persons aged 65 years or older (amounts given are for the 2011 tax year).

“By ensuring you invest astutely from a tax perspective, you ensure that you maximise the benefits of your investments and reap the full rewards in years to come,” says Warneke.