How income bypasses a trust using the conduit principle.

How income bypasses a trust using the conduit principle

Trusts are taxed at 45%, but that rarely matters because they should not earn taxable income, and, if they do, it should bypass the trust completely. Here's how.

Provided taxable income received by or accrued to a trust is distributed to a beneficiary prior to the trust's tax year end (28 February), then it may flow through a pipe, or conduit, directly to the beneficiary without touching the trust at all.


The nature of the income is unchanged. That is, a dividend remains a dividend, interest remains interest, rent remains rent, a capital gain remains a capital gain etc, and is taxed in the hands of the beneficiary as if the trust did not exist.

This means that the trust does not need a bank account to receive or distribute the income and does not need to register as a taxpayer (because it does not earn taxable income).

Whilst this can be advantageous if the beneficiary is on a low marginal tax rate, the downside is that it siphons wealth out of the trust whose very purpose was to grow wealth and protect it from creditors and taxes on death. It would have been far better if the trust never earned income in the first place and that is achieved by interposing a company between the trust and the investment, then the company pays the tax.

Derek Springett, CEO of HArbour & AssociatesNeed more valuable advice about trusts?

Contact us today or set up a free meeting with our CEO, Derek Springett to discuss your options.
You can also visit our online store to see our list of shelf trusts for sale.

Click here
 to buy a company from us, click here to buy a Trust from us or click here to get absolutely FREE, ONGOING business and Trust coaching, and tax advice from our CEO, Derek Springett Pr(Eng); CA(SA); Registered Auditor.


South African Institute of Chartered Accountants. Designation CA(SA)  Internationally Accredited Financial MediatorsIndependent Regulatory Board for Auditors. Designation RA<Engineering Council of South Africa. Designation Pr(Eng) Member of MENSA, the High IQ Society




Find Us Here

Address: 1st floor, Gallagher School Building, 537 Lupton Drive, Midrand, Gauteng