If an RSA resident discretionary Trust vests in a non-resident beneficiary an amount of interest in the same tax year of accrual/receipt, does the conduit principle as codified by Section 25B of the Income Tax Act apply, with the result that the Trust pay
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
We accept that your statement that “the conduit principle as codified by Section 25B of the Income Tax Act apply” refers to the vesting of the amount of interest in discretionary beneficiaries in the same year of the accrual thereof to the trustees (of the trust). This of course assumes that the trustees acted in terms of their mandate – a discretionary trust – in vesting the interest that accrued.
We agree that, in terms of section 25B(2) the amount of the interest accrued and vested will be deemed to not have accrued to the trust. So, one can say that ‘no tax liability’ arises in the trust in this respect. The withholding obligation is not a tax liability.
One would have to observe the double tax agreement, if any, between the RSA and the country of residence of the “foreign person” (see below), or the “beneficial owner” (as used in most agreements). The agreement may also place a limit on the rate of tax that will apply.
Section 25B(1) refers to an amount which have “been derived for the immediate or future benefit of any ascertained beneficiary who has a vested right to that amount during that year”. Under 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.
The withholding tax on interest, sections 50A – 50H of the Income Tax Act, is substantially the same as the dividends tax. The main difference is that section 50A refers to a “foreign person” (being any person that is not a resident of the RSA) whereas section 64D refers to the “beneficial owner” (being the person entitled to the benefit of the dividend attaching to a share). The withholding tax on interest applies where the payment is made to a foreign person as indicated above. In addition, section 50D provides instances where the amount of interest paid by a specific entity (the government, banks, etc.) is exempt from the withholding tax on interest.
Section 50B refers to an “amount of any interest that is paid by any person to or for the benefit of any foreign person”.
If the beneficiary has a vested right to the interest, and didn’t acquire the right following a decision taken by the trustees, then one would have no problem saying that the interest, as paid to the trust, is paid for the benefit of the foreign person (the beneficiary not resident in the RSA).
The question is then whether, if the beneficiary only obtains the right in consequence of the exercise by the trustee of a discretion vested in him or her in terms of the relevant deed of trust, whether the same can be said. In arriving at your opinion in this respect, you will use
In Prévost Car Inc. V the Queen, Judge Rip said that in his “view the "beneficial owner" of dividends is the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received. The person who is beneficial owner of the dividend is the person who enjoys and assumes all the attributes of ownership. In short the dividend is for the owner’s own benefit and this person is not accountable to anyone for how he or she deals with the dividend income. When the Supreme Court in Jodrey stated that the "beneficial owner" is one who can "ultimately" exercise the rights of ownership in the property, I am confident that the Court did not mean, in using the word "ultimately", to strip away the corporate veil so that the shareholders of a corporation are the beneficial owners of its assets, including income earned by the corporation. The word "ultimately" refers to the recipient of the dividend who is the true owner of the dividend, a person who could do with the dividend what he or she desires. It is the true owner of property who is the beneficial owner of the property.”