Application of withholding tax on interest to distributions from a trust
14 March 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
The answer to this query is based on legislation as at 14/03/2014.
looking for some assistance with regard to the application of the withholding
tax on interest in the following circumstances:
1) A trust holds
an interest bearing investment in a SA bank and earns interest during the
year of assessment.
2) The trustees exercise their discretion and
distribute a lump to a non-resident contingent beneficiary of the trust.
3) Applying the conduit principle embedded in section 25B a portion of
the lump sum comprises interest earned by the trust from the interest
investment. Is the distribution a ‘payment to or for the benefit of a
non-resident’ for purposes of section 50B? If yes, would you concur that the
‘payment’ is made by the trust and not the bank despite the conduit
principles contained in s25B? (I’m trying to establish whether the section
50D exemption applies).
are a few concerns:
1.) I am not certain whether the trust "paid”
the interest but I think rather the trust "distributed” the interest. I think
that the borrower has paid the interest regardless. It can be a case where
the bank pays the trust on behalf of a beneficiary with a vested right to the
interest and the interest is then paid to the benefit of the non-resident.
Let’s assume that the trust is the person paying and not merely distributing
the interest, then one has to consider whether the conduit principle will
apply (interest from bank which qualifies for the s 50D exemption) or, on the
other hand will it retain its identity as interest but lose the identity of
the nature of the person paying the interest.
2.) If it is the
case that only the borrower can pay the interest, then this might leave some
scope for formulating a scheme to get past the payment of withholding tax
where the borrower is not a bank. The borrower pays interest to a resident
trust, the trust claims certain deductions and makes a distribution of
capital to a non-resident. I don’t however expect this to be a problem as
non-residents are currently exempt from the payment of tax on interest earned
in terms of s 10(1)(h), and the SA trust will pay tax on the interest.