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FAQ - 8 November 2017

08 November 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is interest that is reinvested subject to tax?

Q: Interest earned on an investment, which was capitalized, i.e. the interest was not received in cash in a tax year, but was added to the investment. Is it taxable?

A: The matter is dealt with in section 7(1) of the Income Tax Act.  It provides that income is deemed to have accrued to a person notwithstanding that such income has been invested, accumulated or otherwise capitalized by him or that such income has not been actually paid over to him but remains due and payable to him or has been credited in account or reinvested or accumulated or capitalized or otherwise dealt with in his name or on his behalf, and a complete statement of all such income must be included by that person in the returns rendered by him under the Income Tax Act. 

2. Will a trust pay CGT on transfer of residential home to beneficiary, who is using it as primary residence?

Q:  The primary residence was inherited into the Trust out of an estate at valuation value of R 900 000 upon death of Mrs XYZ who used it as primary residence. The residence is now being occupied as “primary residence” by one of the capital beneficiaries of the Trust. The Trustees have discretionary rights in terms of the Trust Deed to, at any time, transfer capital to beneficiaries. The current municipal value of the residence is R 1 300 000. Should the Trustees resolve to transfer the property to the beneficiary, will there be any rollover relief for the Trust in terms of CGT, or will the Trust be liable to pay CGT, will it be seen as a Sale of Property?

A: You indicated that the trustees ‘want to distribute the property’ to the beneficiaries.  We therefore accept that the beneficiaries didn’t have a vested right to the assets concerned before then.  Paragraph 80(1) of the Eighth Schedule to the Income Tax Act provides that a capital gain that arises in respect of the vesting by a trust of an asset in a trust beneficiary is to 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 to whom that asset was so disposed of.  This assumes that the beneficiary is a resident of the RSA.  The capital gain is then not ‘taxed in the trust’, but is not a ‘roll-over relief’ as you say.

Remember that, in terms of paragraph 44 of the Eighth Schedule, an interest of whatever nature in an asset of a trust is not an interest in a primary residence.  The R2 million exclusion therefore doesn’t apply.

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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