Dividend Tax Consequences
05 April 2012
Posted by: TaxFind™
Dividend Tax Consequences
What are the dividend tax consequences when a dividend is distributed to a trust?
The Income Tax Act defines any trust as a person, implying that the Trust can be taxed in its own right. Moreover there are three types of trusts:Firstly, a trust can be discretionary which means that the beneficiaries have no vested rights.In this case, it is not certain that the beneficiary will receive the income and therefore the beneficiary will not be taxed on it.
Secondly, a trust can be vesting which means that the beneficiaries have vesting rights.If a beneficiary has a vested right to the income retained in the trust, it means that that the income is effectively the beneficiary’s and will be taxed on it.Thirdly, a trust can be bewind which means that the trust does not own the assets, but that the beneficiaries are the owners of the assets.A trust, in this situation, only has the authority to manage the assets.The trust, in this case,controls and manages assets on behalf of beneficiaries who own the assets.
So in vesting and bewind trust types, the beneficiary will respectively have a vested right to the dividend or be the owner of the dividend. In both of these trust types the beneficiary is the beneficial owner of the dividend for the purposes of the dividends tax.If the beneficiary wishes to claim an exemption from the dividends tax (for example, because it is a resident company) that beneficiary must complete the prescribed Beneficial Owner Declaration Form and submit it to the company declaring the dividend.
The Dividend Tax discourse would change if the trust is a Discretionary Trust.In the case, of a discretionary trust-type,the trust will be the beneficial owner of a dividend unless the trustees have:
•Vested that dividend in a beneficiary before the date on which the dividend is paid or becomes payable by the company declaring it; or
•Vested the dividend after the date on which the dividend becomes paid or payable but before the end of that year of assessment of the trust, in which case the beneficiary will be the beneficial owner of the dividend.Thus,provided that vesting takes place in the same year of assessment, sections of the Income Tax Act will deem the dividend to have been received by or accrued to the beneficiary during the year of assessment thereby making the beneficiary the beneficial owner of the dividend for dividends tax purposes.
Should the trustee fail to vest the dividend during the same year of assessment in which it was received by or accrued to the trust, the trust will be the beneficial owner of the dividend and the company paying the dividend must withhold the dividends tax at 15%.
The dividend will become part of the trust capital and will lose its character as a dividend in subsequent years of assessment.It follows that no refund to an exempt beneficiary such as a resident company will be possible in these circumstances because the beneficiary would never have become the beneficial owner of the dividend.A refund would, however,be possible as long as the vesting of the dividend occurs during the same year of assessment in which the dividend was received by or accrued to the trust.
Source: By Mahomed Kamdar, Technical Advisor, SAIPA (Tax Professional)