The cast of characters
The structure has three layers plus the people who benefit, and four roles drive everything that follows.
- The founder (also called the donor or settlor) creates the trust and puts the first assets or funding in.
- The trustees hold and manage the trust property for the beneficiaries. They owe strict duties and may only act once the Master of the High Court has issued letters of authority.
- The beneficiaries are those who may benefit — typically the founder, a spouse, children and often later generations. In a discretionary trust they have only a hope of benefiting until the trustees exercise their discretion; in a vesting trust they already hold fixed rights.
- The company (Newco) is an ordinary private company under the Companies Act 71 of 2008. The trust holds its shares and it holds the underlying asset — here, immovable property.
Most founders wear more than one hat: the same person is frequently the founder, a trustee and a beneficiary all at once. That overlap is exactly why the connected-person rules below catch the whole structure. We unpack each role in founder, trustee and beneficiary.
How widely SARS reads “beneficiary”
The word “beneficiary” carries a lot of weight in this area, because being a beneficiary is what makes a trust a connected person. SARS reads the term very widely — it is not confined to people who have already received something, and it captures contingent beneficiaries who may only benefit on some future event.
“beneficiary” in relation to a trust means a person who has a vested or contingent interest in all or a portion of the receipts or accruals or the assets of that trust; [IN 67 adds:] “This definition is wide and includes capital and income beneficiaries with vested rights and discretionary beneficiaries … A contingent beneficiary whose rights are dependent upon, for example, reaching a specific age, will … also be a ‘beneficiary’ prior to that date.”
Note — Interpretation Note 67 (Connected Persons) is now at Issue 4.
The practical takeaway: a discretionary beneficiary who has received nothing, and even a child who will only benefit on turning 18, is already a beneficiary for tax purposes. Majority age is 18 (Children’s Act 38 of 2005, s 17), but the connected-person link does not wait for it.
The “connected person” definition
“Connected person” is the master switch. The Income Tax Act defines it in section 1(1) by working through each type of taxpayer — a natural person, a trust, and a company — and listing who is connected to each. The extracts that matter for a family structure are these:
“connected person” means— (a) in relation to a natural person— (i) any relative; and (ii) any trust … of which such natural person or such relative is a beneficiary; (b) in relation to a trust …— (i) any beneficiary of such trust; and (ii) any connected person in relation to such beneficiary; (bA) in relation to a connected person in relation to a trust …, any other person who is a connected person in relation to such trust; (d) in relation to a company— … (iv) any person … that … holds, directly or indirectly, at least 20 per cent of— (aa) the equity shares in the company; or (bb) the voting rights in the company; …
Read those paragraphs together and the family structure folds in on itself: the founder is connected to the trust (because the founder benefits), the trust is connected to every beneficiary, and Newco is connected to whoever holds 20% of it — which is the trust. Everyone ends up connected to everyone.
The connected-person chain
It helps to trace the chain link by link, using the Nkosi family as the worked example.
Why “connected” matters
The connected-person label is not academic — it is the trigger for most of the anti-avoidance rules discussed across this guide. Once the parties are connected, the following all switch on.
- Section 7C — an interest-free or low-interest loan to the connected trust creates an annual deemed donation.
- Section 7 attribution — income or gains that reach a beneficiary by reason of the founder’s donation, settlement or other disposition can be taxed back in the founder’s hands.
- Paragraph 38 of the Eighth Schedule — a transfer to a connected person for less than an arm’s-length price is deemed to happen at market value, so a built-in gain cannot be transferred away cheaply.
- Donations tax — a sale to a connected person at undervalue is treated as a part-donation, bringing the 20% donations-tax charge into play.
Frequently asked questions
It is a defined term in section 1(1) of the Income Tax Act 58 of 1962 that links people and entities too close to deal at arm’s length. For a natural person it includes any relative and any trust of which the person or a relative is a beneficiary; for a trust it includes every beneficiary; and for a company it includes anyone holding at least 20% of the equity shares or voting rights.
Almost always, yes. Under section 1(1), a trust is connected to a natural person if that person, or any relative, is a beneficiary of the trust. Because the founder is usually also a beneficiary — and so are the spouse and children — the founder, the trust and the beneficiaries are all connected to one another. See the founder, trustee and beneficiary roles.
The label switches on most of the anti-avoidance rules: section 7C on interest-free loans to the trust, the section 7 attribution rules, paragraph 38 of the Eighth Schedule (a non-arm’s-length transfer is deemed to happen at market value) and the donations-tax regime. Outside a connected relationship, several of these rules simply do not apply.
Yes. Section 7C is not limited to loans made directly to a trust. A low- or no-interest loan to a company in which the connected trust holds at least 20% of the equity shares or voting rights is also caught — so routing the loan through Newco instead of the trust does not avoid the deemed-donation charge.
Yes. A natural person’s relatives are connected persons under section 1(1). The Act defines a relative widely — a spouse and anyone related by blood or adoption within the third degree, plus the spouses of those relatives — so your spouse, children, parents and siblings are all connected persons to you.