Tax consequences of one trust distributing a building to a beneficiary trust
12 December 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: A trust is
VAT-registered and owns a few commercial buildings from which it earns rental
income. The Trust wants to distribute a building to one of its beneficiaries,
who is also a trust.
My questions are:
- Is this a "deemed disposal” for Vat, and does
Output Vat have to be paid on the distribution by the distributing trust?
- Does CGT have to be paid by the distributing
trust on the distribution?
- Does the beneficiary trust have to pay transfer
duty as well as Vat (I heard that the exemption from transfer duty if vat is in
the price, does not apply to trusts?)
- I assume the beneficiary trust’s base cost
becomes the market value of the property at the time of the distribution?
- Is there any advantage to distributing the
asset, as opposed to simply selling it to the beneficiary trust?
The vesting (distribution) of the property (being goods as
defined) by the trust a vendor is a supply of goods and a taxable supply. There is however no consideration, unless
section 10(4) of the Value-Added Tax Act applies. As a beneficiary of a trust is a connected
person in relation to the trust. If
section 10(4) applies the consideration in money for the supply shall be deemed
to be the open market value of the supply.
The capital gain considerations are in terms of paragraph
80(1). It disregards the capital gain in
the trust (the one vesting or making the distribution) and this gain must then
be taken into account for the purpose of calculating the aggregate capital gain
or aggregate capital loss of the beneficiary (the other trust) to whom that
asset was so disposed of. This only
applies if the beneficiary (the recipient trust) is a resident of the RSA.
Section 9(15) of the Transfer Duty Act provides that no duty
shall be payable in respect of the acquisition of any property under any
transaction which for purposes of the Value-Added Tax Act, 1991, is a taxable
supply of goods to the person acquiring such property if –
(a) the transferor of the property under such transaction,
in a declaration in such form as the Commissioner may prescribe, certifies that
value-added tax payable under the said Act has been paid to him in respect of
the said supply by the transferee and has been accounted for by him in a
relevant return required to be furnished by him under the said Act or will be
so accounted for in such return within the time allowed under that Act for the
rendering of such return, or where such supply was subject to the said tax at
the rate of zero per cent, such information regarding such supply as the
Commissioner may require has been furnished to him;
(b) any security required by the Commissioner for the
payment of such tax has been lodged, if such tax has not yet been paid; and
(c) the Commissioner has issued a certificate to the effect
that the requirements of this subsection for the granting of the exemption have
We don’t have enough information to comment on whether the
section 9(4) exemptions apply in this instance.
As the disposal is between connected persons paragraph 80 of
the Eighth Schedule applies. The base
cost for the recipient trust is therefore the market value at the time of
Your last request is not tax related and may require more
than the guidance offered by SAIT.
Follow-up Qs: I
am still not 100% clear.
- Is there "no consideration” for the
distribution, only if both parties are vat vendors?
- Will section 10(4) apply only when a beneficiary
is not a Vat vendor? Or will it apply
when a beneficiary is a connected person?
Or will it apply to both?
- I am not sure when it’s a nil transaction and
when it’s a market value transaction?
- If both parties are Vat vendors, will this be a
"zero rated” supply? Or an "exempt”
- If both the trust and the beneficiary are vat
registered, then is there no transfer duty payable because the deemed supply is
zero rated for vat?
- If yes, does this apply to any beneficiary? And
not just for natural persons?
- What info do I need to have given to see if the
9(4) exemption will apply?
- Is a beneficiary of a trust always a connected person, by
virtue of the fact that he/it is a beneficiary?
There is no consideration because there is a distribution by the trust and the
recipient beneficiary doesn’t have to pay.
Section 10(4) of the Value-Added Tax Act then deems the consideration in
money for the supply to be the open market value of the supply in the following
circumstances (all of which must be present):
- a supply is made by a person for no
consideration or for a consideration in money which is less than the open
market value of the supply; and
- the supplier and recipient are connected persons
in relation to each other; and
- if a consideration for the supply equal to the
open market value of the supply had been paid by the recipient, he would not
have been entitled under section 16 (3) to make a deduction of the full amount
of tax in respect of that supply.
With respect to the last one: the recipient would then, in
addition to being a vendor, also have to use the goods (the property) for
making taxable supplies, for section 10(4) not to apply.
It then applies where the recipient is a connected
person. In terms of the definition in
section 1(1) of the Act, connected persons means "any trust fund and any person
who is or may be a beneficiary in respect of that fund”.
The section 9(15) exemption (from Transfer Duty) then only
applies if the "value-added tax payable under the said Act has been paid to him
in respect of the said supply by the transferee and has been accounted for by
him in a relevant return required to be furnished by him under the said Act or
will be so accounted for in such return within the time allowed under that Act
for the rendering of such return, or where such supply was subject to the said
tax at the rate of zero per cent”. The
supply (at no consideration) is not a zero rated supply and we submit that in
this instance no tax has been paid. In
other words the exemption doesn’t apply.
You may want to confirm this by requesting an opinion from SARS.
Section 9(4) (of the Transfer Duty Act) applies:
• Where trust property is transferred by the administrator
of a trust in pursuance of the will or other written instrument in pursuance of
which the administrator was appointed –
(i) To the persons entitled thereto under such will; or
(ii) to a relative as contemplated in the definition of
'relative' in section 1 of the Estate Duty Act, 1955 (Act No. 45 of 1955),
where the trust was founded in terms of such other written instrument by a
natural person for the benefit of such relative: Provided that no consideration
is paid directly or indirectly by such relative in respect of the acquisition
of such trust property; or
• Where property is
restored by a trustee of an insolvent estate to the insolvent; or
• in respect of the
registration of trust property in the name of a trustee in his capacity as
trustee if such trust property is held by such trustee as trust property at the
date of commencement of the Trust Property Control Act, 1988, and such
registration is required in terms of section 11(2) of the said Act.
The Income Tax Act (relevant to the base cost definition)
defines a connected person in relation to a trust as:
(i) Any beneficiary of such trust; and
(ii) Any connected person in relation to such
Therefore a beneficiary is always a connected person in
relation to the trust – see SARS’s CGT guide.
Further Qs: I
understand 90% what you are saying, but I have 1 question that is puzzling me
still. If i may, I would like to ask you.....
If section 10(4) does not apply, then I assume that the
transaction is subject to 14% x nil = nil.
My question then, does this have the same effect as a"
supply of a going concern” for vat?
i.e., vat is paid, but on a value of nil.
Surely this means that transfer duty should be exempt, just
like a zero rated going concern?
Further As: You
are correct that where a supply is made for no consideration the value of that
supply is deemed to be nil – section 8(23).
In terms of section 10(2) the consideration normally includes the tax,
but as there is no consideration the tax will be nil.
In our view it is not the same as a zero rated supply. Whilst in both cases the result is nil, in
the one instance the tax rate is 0% and in the other 14%.
The problem with regard to the transfer duty exemption is
that the tax must be paid. It was our
view that the ordinary meaning of the word paid would not include the tax of
nil. It is therefore our view, both for
section 8(23) and section 10(4) that the exemption would only be available if
the transferee paid the tax.
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