Numerous complications have delayed the finalisation of the estate of an individual who died in 2015, whose estate is not registered as a taxpayer in its own right given the date of death. Income generated in the estate therefore accrues the beneficiaries
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
We agree that, in terms of section 25(1) of the Income Tax Act (and applicable where the date of death is before 1 March 2016, any income received by or accrued to or in favour of any person in his capacity as the executor of the estate of a deceased person, and any amount so received or accrued which would have been income in the hands of the deceased person had it been received by or accrued to or in favour of such deceased person during his lifetime, shall, to the extent to which such income or amount has been derived for the immediate or future benefit of any ascertained heir or legatee of such deceased person, be deemed to be income received by or accrued to such heir or legatee, and shall, to the extent to which such income or amount is not so derived, be deemed to be income of the estate of such deceased person.
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 estate, is paid for the benefit of the foreign person (the beneficiary not resident in the RSA).
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.”
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.
We agree with you that section 50D(1)(a)(i)(bb) may well apply. This would however require of the beneficiaries, not resident in the RSA, to have submitted to the person making the payment a declaration in such form as may be prescribed by the Commissioner that the foreign person is, in terms of section 50D(3) or an agreement for the prevention of double taxation, exempt from the withholding tax on interest in respect of that payment. See section 50E(2)(b).