Do distributions from a SA Trust to a non resident beneficiary follow the normal “conduit pipe” principles?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The “conduit principle” was codified into RSA tax law in section 25B in 1991. With the introduction of capital gains it was also included in the Eighth Schedule to the Income Tax Act (paragraph 80).
Essentially, when ‘income’ is vested in the beneficiary it will not be deemed to have accrued or have been received by the trust. The beneficiary will then be deemed to have received it and will account for it.
With regard to capital gains the position is the same, unless the beneficiary is not a resident of the RSA. The gain vested will then be taxed in the trust.
The interest and dividends vested doesn’t qualify for a deduction in the trust. It is simply deemed not have accrued to the trust in the first place, unless of course it accrued in the previous year and was not vested then. You are correct that the non-resident will receive the dividends distributed as exempt from normal tax. With respect to interest (paid after 1 March 2015) the withholding tax on interest may apply.
The “conduit principle” was codified into RSA tax law in section 25B in 1991. With the introduction of capital gains, it was also included in the Eighth Schedule to the Income Tax Act (paragraph 80).
Essentially, when ‘income’ is vested in the beneficiary it will not be deemed to have accrued or have been received by the trust. The beneficiary will then be deemed to have received it and will account for it.
With regard to capital gains the position is the same, unless the beneficiary is not a resident of the RSA. The gain vested will then be taxed in the trust.
SARS discusses this in detail in their CGT guide – page 541 and onwards. Their first statement is as follows:
“The default position is that a trust must account for any capital gain or loss that arises when it disposes of an asset. As discussed in 14.11.1, para 80 provides an exception to the default position by attributing a capital gain from the trust in which it arises to a resident beneficiary. No mention is made in para 80(1) and (2) of a non-resident beneficiary, and so no attribution to such a person is possible.”
They then deal with the opposing views (similar to the ones mentioned in your email).
I believe that it is certain that SARS would challenge the position taken that the capital gain vested by an RSA trust in a non-resident beneficiary, is not subject to tax in the RSA.