Trust Z is a registered Non-Profit Organisation (NPO) and is also the main shareholder of Company K. Company K focuses on providing animal health products. Company K receives capital distributions from Trust Z, which is used to provide training to their employees in terms of an agreement with Trust Z.
Are the capital distributions received by Company K subject to income tax in the hands of Company K?
It’s not clear whether Trust Z is a Public Benefit Organisation (PBO) or merely an NPO. However, it doesn’t matter, as long as Trust Z is acting within its powers in making these distributions. Company K receives the distributions and uses them to provide training to staff. Presumably Company K deducts the training costs for income tax purposes in terms of section 11(a) of the Income Tax Act. From this it will follow that the distributions will be taxable under section 8(4)(a) of the Act.
Relevant tax law
Section 8(4)(a). “There shall be included in the taxpayer’s gross income all amounts allowed to be deducted or set off under the provisions of sections, 11 to 20, inclusive…which have been recovered or recouped during the current year of assessment”.
A "capital distributions" is not necessarily capital in nature for tax purposes. But in any event, section 8(4)(a) doesn’t distinguish between capital and revenue.
Further webinar commentary on The meaning of capital in nature in the context of the gross income definition can be accessed here.