A beneficiary and trustee of a Trust, donates R10 million to the Trust in year one. The beneficiary is a tax resident in South Africa and the Trust is not a tax resident in South Africa. The Trust uses the funds to acquire a property. In year five, the property was sold for a profit of R2 million, which was distributed in year five to the beneficiaries of the Trust. The settlor of the Trust donated an initial R100 to form the Trust and is still alive. In year six the initial R10 million that was donated to the trust is also distributed to the beneficiaries.
Donations tax is not the issue if the capital gain is vested in the beneficiary (and it matters not if the beneficiary is tax resident in the RSA) or disposed of under and in pursuance of the trust (in accordance with the trust deed). The conduit principle, for purposes of normal tax as far as capital gains are concerned, was codified into the tax law in paragraph 80 of the Eighth Schedule to the Act.
The tax consequences for the resident is to be determined under paragraph 80(3), which is copied below for ease of reference:
"Where during any year of assessment any resident acquires a vested right to any amount representing capital of any trust which is not a resident, and –
(a) that capital consists of or is derived, directly or indirectly, from an amount –
(i) determined as a capital gain of that trust; or
(ii) which would have been determined as a capital gain of that trust had that trust been a resident, in any previous year of assessment during which that resident had a contingent right to that capital; and
(b) that capital gain or the amount that would have been determined as a capital gain has not been subject to tax in the Republic in terms of the provisions of this Act, that amount must be taken into account as a capital gain when determining the aggregate capital gain or aggregate capital loss of that resident in respect of the year of assessment in which that resident acquired that vested right."
Further webinar commentary on Capital Gains Tax can be accessed here.