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[FAQ] Distributions from a Trust when married in community of property
- 25 March 2021
- Individuals Tax
- Piet Nel
This article is based on tax law for the year ending 28 February 2021.
Background
A taxpayer is married in community of property. Would the distributions received from a trust (capital gain, interest & rental) be split between spouses or would the distributions be 100% taxed in the hands of the beneficiary?
Answer
More information is needed before a tax position or opinion is given. It is not the ‘distribution’ (dies venit) that is relevant, but vesting (dies cedit).
We accept that the right of the spouse to the income is a discretionary one and that the trustees will take a decision to vest an amount of income that accrued to the trustees during the same year of assessment. You will also have to determine if it may be excluded from the joint estate.
Whether or not the spouse, your client (or the one not a beneficiary) must declare this in his or her return of income, depends on the nature of the income.
Section 7(2A) of the Income Tax Act deals with income derived by persons married in community of property and the relevant part thereof reads as follows:
In the case of spouses who are married in community of property –
(a) any income (other than income derived from the letting of fixed property) which has been derived from the carrying on of any trade ...
(b) … and any income derived otherwise than from the carrying on of any trade shall be deemed to have accrued in equal shares to both spouses: Provided that any such income which does not fall into the joint estate of the spouses shall be deemed to be income accrued to the spouse who is entitled thereto.
The principle, under section 25B of the Act, is that when an amount is vested by the trustees in consequence of their exercise of a discretion, section 25B(2) read with 25B(1) will deem that amount to have accrued to the beneficiaries. One can add, deem it to have accrued to them directly, and this applies when the accrual to the trust (trustees) and the vesting event took place in the same year of assessment.
The capital gain is more complex. Paragraph 80 of the Eighth Schedule to the Act deals with it. Again, it is accepted that the asset was disposed of by the trustees and they vested, in terms of the discretion, the capital gain in the beneficiary. The beneficiary is married in community of property.
It is possible to think that the capital gain must then not be split equally. Principally because paragraph 14 deals with disposal of an asset jointly owned. The Eighth Schedule doesn't deal with it specifically in another place.
SARS, in their CGT guide, states that a capital gain is an artificial tax concept - proceeds less base cost. Can one argue that the beneficiary's right, obtained when the decision was made to vest the gain, is an asset which is disposed of when the amount is distributed?
Webinar Commentary
Refer to webinar commentary on the Webinar: Monthly Tax Update - March 2021 here.