My question relates to S.25B of the Income Tax Act which codified the conduit principle in terms of income flows to trusts and beneficiaries. Will dividends that flow across multiple discretionary trusts during a single year of assessment retain their nat
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Whilst not relevant to your request, SARS’s view, where an asset is vested through multiple discretionary trusts, is found in paragraph 14.11.5.1 of their CGT guide. SARS gives the following example:
“Assume that discretionary Trust A’s beneficiary is discretionary Trust B and Trust B’s beneficiary is X, Trust A vests an asset in Trust B which results in a capital gain of R100 being attributed to Trust B under para 80(1).”
Based on the wording of paragraph 80(1) of the Eighth Schedule to the Income tax, SARS then holds the view that Trust B must account for the capital gain, and the vesting of the same asset by Trust B in X will not result in the capital gain of R100 being attributed to X. This is essentially because Trust B has not determined a capital gain in respect of the vesting of an asset and paragraph 80(1) can therefore have no application.
In terms of section 25B(2) “where a beneficiary has acquired a vested right to any amount referred to in subsection (1) in consequence of the exercise by the trustee of a discretion vested in him or her in terms of the relevant deed of trust, agreement or will of a deceased person, that amount shall for the purposes of that subsection be deemed to have been derived for the benefit of that beneficiary.” A beneficiary will, in this instance also include a trust – being a person who has a contingent interest in all or a portion of the receipts or accruals of a trust. To the extent to which that amount has been vested, it is deemed to have been derived for the immediate or future benefit of any ascertained beneficiary who has a vested right to that amount during that year.
Whilst the parties bear the onus of proof in this regard, we agree with your view that, once vested, it will be deemed that the dividend accrued to the recipient trusts and the ultimate beneficiary.
It may be an academic view, as the dividend (being a distribution by an RSA resident company) is exempt from normal tax and only subject to the dividends tax.