Trust A earns rental profit of R1 000 000.00 which it distributes to Trust B in full. Can trust B which has received this distribution then again distribute the R1 000 000.00 to its beneficiaries, for example R200 000.00 each to 5 beneficiaries?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Your request relates to the vesting through what is colloquially referred to as ‘multiple trusts’. The law in this respect differs where ‘income’ is vested, from where an asset or a capital gain is vested.
We don’t understand the reference to “would be any problem with doing this” in this request and the “can be done” one in the previous request. For purposes of our guidance we assume that it relates to the tax consequences of the vesting event. We mentioned that in our first response, but will again confirm that: the beneficiaries (the five beneficiaries, who we accept are natural persons, and the recipient trust as the beneficiary in the first instance) will obtain a right to the income of the first trust (trust A) following a decision by the trustees.
With respect to the amounts that accrued to the first trust, trust A, that then means, in terms of section 25B of the Income Tax Act, that the amount has been derived for the immediate or future benefit of any ascertained beneficiary who has a vested right to that amount during that year, and is then deemed to be an amount which has accrued to that beneficiary. Trust A is then, in a sense, tax neutral with respect to the amount so derived and vested (in the same year).
The same principle applies with respect to the second trust – there is also an amount … derived for the immediate or future benefit of any ascertained beneficiary who has a vested right to that amount during that year.
It is the decision of the trustees, as we explained earlier, that creates the vested right and the ascertained beneficiary and section 25B(2) then deems it to an amount derived for the benefit of this beneficiary.
We dealt with deductions in our first response because we didn’t know what exactly is vested by the trustees. Farming, as does mining, requires the person wanting to make the deduction, to actually carry on the farming operations. You don’t require any guidance on that, but we will just add a last comment.
Section 25B(3), allows for (or deems) a “deduction or allowance which may be made under the provisions of this Act in the determination of the taxable income derived by way of any amount referred to in” section 25B(1), to be “a deduction or allowance which may be made in the determination of the taxable income derived by that beneficiary”. One could read the paragraph 12 expenses into that. We submit that section 25B(1) or (2) doesn’t takes preference over section 26A. Put differently, the beneficiaries (discretionary) may well, if they don’t carry on the farming operations, not be entitled to the paragraph 12 expenses incurred by the trust.