According to SARS’s Comprehensive Guide to Capital Gains Tax (External Guide (Issue 5)) under section 14.11.6.3. & 14.11.6.3A (page 551 & 552) a “capital gain of a discretionary trust can be attributed only once and cannot flow through multiple resident d
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The SARS view, with regard to paragraph 80(1) and the capital gain that arises on the vesting of the asset in a beneficiary trust, is that the recipient trust “must account for the capital gain, and the vesting of the same asset” by the recipient trust in a beneficiary (of the recipient trust) will not result in the capital gain being attributed to this beneficiary. They base their view on the fact that no capital gain will arise in the recipient trust when it vests the asset in the (final) beneficiary because, under paragraph 38, the second trust acquired the asset for a base cost equal to its market value at the time of vesting and its proceeds upon immediately vesting the asset in the beneficiary are equal to that same market value. The recipient (or second) trust has therefore not determined a capital gain in respect of the vesting of an asset and paragraph 80(1) can therefore have no application.
The same doesn’t apply when a capital gain resulted from a disposal of an asset by the trust and the subsequent vesting of the resulting capital gain or part thereof. SARS, in their guide, says the following:
“Unlike multiple discretionary trusts, the flow-through principle can apply to multiple vesting trusts. (you also refer to this) … A similar result will ensue when a discretionary trust has a vesting trust as one of its beneficiaries. If the discretionary trust sells an asset to a third party and vests the resulting capital gain in the vesting trust, it is the resident beneficiaries of the vesting trust who must account for the capital gain since the vesting trust stands in the position of a pure administrator having no beneficial interest in the capital gain. However, the trust deed must be carefully scrutinized in order to determine whether the beneficiaries indeed have a vested interest in the capital gain.”
In a sense, the SARS view, where the beneficiaries of the recipient trust have vested rights, allow for the capital gain to be attributed to the (ultimate) beneficiaries, but only where they have a vested right to the gain.
With regard to other amounts (not capital gains), section 25B(2) applies “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 that, once vested, it will be deemed that the amounts accrued to the recipient trusts and the ultimate beneficiary.
With regard to dividends, this 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.
In essence then, section 25B doesn’t have the same wording as the relevant paragraphs in the Eighth Schedule, and can well be interpreted that amounts vested ‘flows through to the ultimate beneficiary’. It seems that the SARS view accepts that this will only apply if the beneficiary, in the second trust, has a vested right to the amounts vested by the first, or distributing trust. To the best of our knowledge, there is no court case (or other interpretation) that supports this view. We do however agree with SARS when they say, in the CGT guide, that “in the case of a discretionary trust the trustee is no longer merely an ‘administrative conduit pipe’ for tax purposes. The trust has been clothed with its own separate legal persona and is a taxable entity in its own right.”