I have two trusts for which the beneficiaries are exactly the same (capital and income). The trust are also beneficiaries of each other. Trust A earns income from farming and Trust B from rental of a solar farm on the property. The trustees distribute the
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
We suspect that your request does not relate to whether the trustees are authorised to vest the amounts, but rather what the tax consequences of such a vesting event would be.
The tax event is not the distribution of the amount, but the vesting thereof by the trustees, or the trust deed (if the rights of the beneficiaries are not subject to the discretion of the trustees).
Factually, in this instance, it is ‘income’ that is vested and then distributed. Section 25B would then apply. 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 (a discretionary one in this instance) 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. It then is the treated the same as if the recipient trust had a vested interest in the ‘income’.
Section 26(1) of and the First Schedule to the Income Tax Act applies only when the taxpayer is carrying on farming operations. There is no definition of the expression ‘farming operations' in the Act. We submit that section 25B(1) or (2) doesn’t takes preference over section 26A. Put differently, the beneficiary (discretionary and the recipient trust) may well, if they don’t carry on the farming operations, not be entitled to the paragraph 12 expenses incurred by the trust. The same applies to the beneficiaries of the second trust.