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Is a trust that provides personal services subject to employees‘ tax?

Published May 25, 2022



Phia van der Spuy

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Some people still regard trusts as mechanisms to save tax. For example, they structure trusts as “independent contractors” to avoid being subject to employees’ tax on providing personal services and claim deductions for other expenses through the trust that they would otherwise not be able to claim if they were directly employed.

People attempt to use the conduit principle to distribute income generated in the trust among beneficiaries (typically minor children) to reduce or avoid tax on such income. People even attempt to extract profit from their own companies into trusts by providing a “service” to their companies.

Government has, since 2009, introduced stronger anti-avoidance measures regarding employees’ tax. This may have unintended consequences for some trust structures. A “personal service trust” is one which provides services such as consulting, bookkeeping, or designing, which are actually services provided by a person. This differs, for example, from a trust in which income is generated from assets, such as rental property. As a result, “personal service providers”, as defined, are deemed “employees”, which require “employers” to deduct PAYE from amounts paid to them.

What is a “personal service provider”?

Personal service providers include trusts in which any service rendered on behalf of the trust to its “client” is rendered personally by a “connected person” in relation to the trust. Mostly all transactions will be caught in this net, as estate planners, as trustees, usually devise and implement these structures.

The following parties are deemed “connected persons” in relation to a trust: any beneficiary of the trust and any “connected person'' in relation to a beneficiary.

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This is a wide net that SARS casts to capture any transactions that may benefit these parties. When identifying “connected persons”, reference is always made to that person’s connection “in relation to the trust”. The following individuals are regarded as “connected persons” in relation to a trust:

  • A relative of an individual beneficiary of the trust by blood (to the third degree), or marriage.
  • A business partner of an individual beneficiary of the trust, or any “connected person” in relation to this business partner.
  • An individual or their relative who is a member of a close corporation beneficiary of the trust.
  • An individual who, individually or jointly with any “connected person” in relation to themselves, holds, directly or indirectly, at least 20% of a company beneficiary of the trust’s equity share capital or voting rights.
  • An individual, or any person who is a “connected person” in relation to such an individual, who manages and controls any company beneficiary of the trust.

Once the above “connected person” requirement is met, then one of the following provisions should also apply for a trust to be classified a personal service provider:

  • The person would have been regarded as an employee of the client, if the service was not rendered through the trust; or
  • The person or trust rendering the service must perform such service mainly at the premises of the client and such person or trust is subject to the control or supervision of such client as to the manner in which the duties are performed; or
  • More than 80% of the income derived from services rendered is derived (or is likely to be derived) from one client or associated person in relation to the client.

Tax consequences

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Payment to a personal service provider has to be treated as remuneration and is subject to employees’ tax (PAYE). A “personal service provider” trust is subject to PAYE at the maximum rate for individuals of 45% on taxable income. The “employer” has to deduct the tax before payment is made to the trust. As part of the anti-avoidance measures, deductions available to personal service providers are limited to remuneration to employees, contributions to pension, provident and benefit funds, legal expenses, bad debts, expenses in respect of premises, finance charges, insurance, repairs, fuel and maintenance in respect of assets used wholly and exclusively for trade and any amount previously included in taxable income and subsequently refunded by the recipient. The personal service provider cannot deduct wear and tear on assets, so will be worse off than an employee if they use a personal asset for work.

If a trust is a personal service provider, it can deduct taxes withheld by the “employer” from the provisional tax due in the determination of the first and second provisional payments made by it.

Onus on “employer”

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The responsibility for determining whether the trust qualifies as a personal service provider rests with the “employer”. The “employer” will be held liable by SARS for failing to withhold employees’ tax on ‘remuneration’ paid to the trust. People should therefore be careful if they attempt to extract profits out of companies into trusts to save tax as described above.


The trust will not be regarded as a personal service provider where, throughout the year of assessment, it employs three or more full-time employees who are engaged full-time in the business of the trust in rendering any such service. These must be other than any employee who is a beneficiary of the trust, or is a “connected person'' in relation to such a beneficiary.

No PAYE is required to be deducted where the trust provides an affidavit to the “employer” confirming that it does not receive more than 80% of its income from one source. The trust, as “deemed employee” may also apply to SARS for a tax directive for a lower rate of tax to be applied.

Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner and the founder of Trusteeze, the provider of a digital trust solution.

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