Does farming income distributed by a trust to a beneficiary retain its original nature?
24 June 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: I have a
farming trust, which distributes taxable farming income, to another (rental)
trust. The rental trust is a beneficiary of the farming trust. My question to
you is, when the income is recognised in the rental trust, will it retain its
"original nature” as farming income, or will it be seen as "capital income”?
A: Our guidance
assumes that the farming trust is a discretionary trust and that the
distribution is in terms of a decision by the trustees to vest the amount in
the rental trust. Section 25B(2) applies
and deems the amount to be an amount which has accrued to the beneficiary
(rental trust) and not to the farming trust.
On that basis the nature of the receipt will not change as the receipt
by the first trust is effectively ignored.
We are not sure why you raised the issue, but need to point
out that section 26(1) and the First Schedule of the Income Tax Act applies
only when the taxpayer is carrying on farming operations. There is no definition of the expression
‘farming operations' in the Act. The
question whether a person is carrying on farming operations is one of
fact. In the Kluh Investments case Judge
Rogers explained it as follows:
"Section 26(1) does not apply merely because there has
accrued to the taxpayer income which has ‘derived from’ farming operations; the
section applies to a person carrying on farming operations to the extent that
his income is derived from such operations. Two questions must therefore be
answered: (i) Was the person whom SARS wishes to tax a person carrying on
farming operations during the year of assessment in question? (ii) If so, did
the particular item of income in dispute derive from those farming operations?”
From the facts the second trust may well not be carrying on
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.