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Whether expenses borne by a trust are deductible from its income due to conduit pipe principle

15 January 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: A client has a testamentary trust set up to manage the assets for an adult beneficiary. The trust has investments earning interest and dividends as well as a property and motor vehicle. The trust pays the levies and municipal charges for the trust and then also the medical aid for the beneficiary. I know that there is no interest exemption for the trust and assume that the dividends are not taxable but need clarity on the tax position of this income. Am I correct in assuming that the expenses borne by the trust are not deductible against the investment income due to the conduit pipe principle?

A: With regards to the query, where an amount of income is distributed from a trust to its beneficiary by the exercise of a discretion during that year of assessment, section 25B(2) will deem the amount to accrue to the beneficiary.

In respect of expenses, section 25B(3) will allow as deduction under the provisions of the Income Tax Act (ITA) any amount which was incurred in respect of the amount that was distributed to the beneficiary, but limited to so much of the amount distributed (s25B(4) ITA) (i.e. if 50% of the interest income is distributed then 50% of the related expenses can be attributed).

Where the expense is attributed, the trust will not be entitled to also deduct such expense. In essence the income and its corresponding expenses will follow to the beneficiary on distribution during that year of accrual and the beneficiary will then be entitled to claim any qualifying deductions as allowed under the provisions of the ITA.

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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