The tax implications of medical expenses paid by a special trust on behalf of a beneficiary with a disability

The tax implications of medical expenses paid by a special trust on behalf of a beneficiary with a disability

• 21 May 2020
• Nature of the rights of beneficiaries
• Piet Nel

Important:

This article is based on tax law for the tax year ending 28 February 2021.

Background

A Special Trust is created for a person who has a disability. The trust receives interest income from investments made in the trust's name, and pays yearly medical expenses on behalf of the beneficiary with the disability. What will the tax implications be in the trust's name & in the beneficiary's name?

Response

We accept that the beneficiary, the person with a disability as defined in section 6B(1), has a vested right to the income of the trust. If not, we agree with you that the payment of the medical expenses, from the income that accrued to the beneficiaries, would constitute a vesting event.

The trust, special trust or otherwise, cannot make a deduction of the medical expenditure incurred on behalf of a beneficiary of the trust. The principle is that the trustees, in paying these expenses actually vested an amount in the beneficiary (or distributed an amount that vested in the beneficiary). The beneficiary will then be entitled to the section 6B rebate. SARS confirms this in their guide – paragraph 5.8 when they say that:

“Although a special trust is taxable at the rates of normal tax applicable to a natural person, it is not a natural person and accordingly does not qualify for any rebate or exemption that applies only to natural persons, for example, the primary, secondary and tertiary rebates under section 6, the medical tax credits under sections 6A and 6B, or the interest exemption under section 10(1)(i).”

For the beneficiary, to the extent that the amounts so vested constitute ‘income’, the amounts will be included in his or her gross income. The problem, with regard to the medical expenses, is to prove that it was ‘paid by the person’. Section 25B(3) only deals with a deduction or allowance, but we submit that there is a good argument to be made that the beneficiary actually paid the amounts in question.

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