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Can capital beneficiaries of a trust receive capital gains distribution?

03 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: We would like some clarification on the following subject as we are of a differing opinion than some of our colleagues.  A trust sold some of its investments (listed shares) during the financial year. The trust has held the shares for more than five years. The transaction led to capital gains tax in the trust that was subsequently distributed to the beneficiaries and taxed in their personal capacity. The trust had no further taxable income. Some of the beneficiaries were "income beneficiaries” and some were "capital beneficiaries” as described by the trust deed. We are of the opinion that the above capital gains should only have been distributed to "capital beneficiaries” as described in the trust deed and not to "income beneficiaries”. The nature of the distribution was capital in nature and thus the "income beneficiaries” could not receive such a distribution. Our colleagues are of the opinion that both "income” and "capital beneficiaries” are allowed to receive capital gains distributions. Your opinion would be greatly appreciated.

A: In our view this is a trust law matter and not a tax matter as paragraph 80 Eighth schedule of the Income Tax Act does not differentiate as to the beneficiaries right to the distribution but merely deals with whether factually it was distributed (para 80(2) refers to a beneficiary who has a vested right in the capital gain but not in the asset). You would have to determine if the trust deed defines "capital” or "income” and determine whether the relevant capital gain distributed by creating an entitlement to trust assets (i.e. by cash payment or loan account) is settled/distributed by capital or income from the trust as defined by the trust deed.

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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