Technical question on trust If the trust owns the primary residence of the trustee, and the trustee pays the trust to stay in the property, can the trust still claim the expenses incurred? And if there is rental income from the trustee will we loose the e
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
You need to obtain the terms of the agreement between the trust, represented by the trustee, and the trustee, before you can correctly advise the parties here. We will, for purposes of the guidance that follows, accept that the use of the primary residence by the individual concerned, was granted by the trustees because the individual is a beneficiary of the trust. This assumption was made because of your reference to section 7C. It appears unlikely that the trustee is an employee of the trust and the use of the primary residence was given in respect of services rendered.
The trust will only be able to make a deduction of expenditure incurred by it if it carries on a trade. The principle in this instance is that the taxpayer will have to meet the onus of proof with regard to two issues. Judge Conradie explained the two issues as follows in the Warner Lambert case:
“Deductible expenditure has certain characteristics: it must be incurred in the production of income (s 11(a)) and will not be allowed as a deduction against gross income if it is not laid out or expended for the purposes of trade.”
The deduction is then made against the income derived from the trade, probably a rental trade in this instance, but only if the beneficiaries don’t have a vested right to the income (or acquired such a right following a decision by the trustees to vest same).
Section 7C(5)(d) of the Income Tax Act requires that the trust used a loan, advance or credit wholly or partly for purposes of funding the acquisition of an asset and that the natural person who provided the loan or the spouse of that person used that asset as a primary residence throughout the period during that year of assessment during which that trust held that asset.
It therefore requires the person who funded the acquisition of an asset and the person who used the primary residence to be the same person (unless the other person is a spouse of that person). The right of the individual concerned, or his or her spouse, to use the primary residence will be evident from the agreement between the trust (trustees) and the individual or individuals concerned, or at the very least, from the minutes of the trustee meeting approving same. We submit that, where the use of the property is in terms of a rental agreement, that there is a risk that section 7C may well apply to the loan.