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Distribution of a trust asset to a non-resident beneficiary

24 October 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: When a trust has no interest-free loans from a donor and the trustees make a capital distribution to a non-resident, must the trust pay the income tax at 40% and 26.66% if it is distributes the balance to the non-resident? What confuses me is the wording or reference to the phrase ‘donation, settlement or other similar disposition'. According to me, in this case there is no donation, settlement or disposition.

A: You are correct that if there was an interest-free loan and the income accrued by reason of or in consequence thereof, section 7 will apply.  The same principle applies with respect to the capital gain (paragraph 72).  Both these provisions will then deem the ‘income’ to accrue to the donor.  We understand that this does not apply as there is no interest-free loan.  

We are not sure why you refer to section 7(8) and we accepted that the distribution will be in the year of accrual.  The distribution (vesting) of income in the hands of a beneficiary will be deemed to accrue to the beneficiary and the fact that the beneficiary is not a resident is not relevant.  The non-resident beneficiary will have RSA sourced income and will potentially be taxed in the RSA thereon, but at the rates applicable to the beneficiary (not the 40% of the trust). 

The same does not apply to the vesting of a capital gain.  In terms of paragraph 80(2) where a trust beneficiary who is a resident acquires a vested interest (including an interest caused by the exercise of a discretion) in that capital gain (not in the asset) the capital gain so vested must be disregarded for the purpose of calculating the aggregate capital gain or aggregate capital loss of the trust and  must be taken into account for the purpose of calculating the aggregate capital gain or aggregate capital loss of the beneficiary in whom the gain vests.  This only applies where the beneficiary is a resident.  

SARS explains this as follows in paragraph 14.9.2 of their CGT guide: "No flow through of capital gains is permitted when the beneficiary is a non-resident” and "In the case of a non-resident beneficiary any capital gain arising in the trust on vesting will … be taxed in the trust…” – see paragraph 14.11.4 of the guide.  The inclusion rate in the trust is 66,6% and the tax rate is 40%.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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