Trust assets may be treated as the personal assets of a trustee who has used the trust as alter ego
26 March 2012
Posted by: SAIT Technical
Trust assets may be treated as the personal assets of a trustee who has used the trust as his alter ego.
PWC Tax Synopsis - RC Williams
The South African Revenue Service will be avidly studying the decision of the Gauteng High Court in Rees v Harris 2012 (1) SA 583 (SGHC) which affirms, in principle, that in appropriate circumstances a court can ‘lift the veil’ of a trust and treat its assets as the personal property of a trustee.
The decision does not make new law. The landmark judgment of Cameron JA in Land and Agricultural Bank of South Africa v Parker 2005 (2) SA 77 (SCA) explicitly conceded, in principle, that such a lifting of the veil is possible in the context of a trust. Such a lifting of the veil would, of course have far-reaching tax consequences, particularly in relation to income tax and estate duty, with trust income and trust assets being regarded as the personal income and assets of a trustee. The decision in Rees v Harris is significant in two respects. Firstly, it discusses in considerable detail the circumstances in which a court will disregard the existence of a trust and treat its assets as the personal property of a trustee. Secondly, the decision illustrates the considerable evidentiary difficulties faced by a party in establishing the facts that would justify a court in making such an order.
A trust as the trustee’s alter ego
In essence (see the judgment at paras  and ) it would have to be shown that assets, ostensibly belonging to the trust, were the property of the trustee in question (in other words, that the trust was merely his alter ego) or, alternatively, that the trustee had abused the trust for an improper purpose. It seems that trust assets will be regarded as, in reality, the personal assets of a trustee where the trustee did not respect the separate existence of the trust and treated the trust assets as his personal property. As to the abuse of a trust, the allegation in Rees v Harris (see the judgment at ) was that Rees had used the trusts as an instrumentality to house ill-gotten gains derived from the fraudulent activities of the now notorious Barry Tannenbaum, who is currently resisting extradition from Australia to face prosecution in South Africa on charges of operating a ponzi scheme.
By the time of the litigation that is the subject of this decision (in which Harris was claiming repayment of moneys lent by him to Rees), the respondent, Rees (for whom a warrant of arrest on fraud and theft and forgery charges had been issued in South Africa) had taken up residence in Switzerland and had made clear he had no plans to return. Rees did not deny either the loan to himself from Harris, nor its non-repayment. The question before the court was whether the assets of two trusts, of which Rees was a founder, co-trustee and beneficiary, could be attached to found jurisdiction in the civil proceedings for recovery of the debt. The judgment makes clear that, in order to lift the veil of the trust, Harris would have to show that Rees was in full control of the trust, and that the co-trustee (his spouse) was merely his puppet. At first instance, the Gauteng High Court had concluded that a prima facie case had been made out in this regard to justify an order for the attachment of the trust assets to found jurisdiction in the action against Rees.
Inferences can be drawn only when primary facts have been established
On appeal, the full court took a different view and held that "primary facts” had not been established from which the necessary inferences could be drawn that would justify a lifting of the veil. The court held (at para ) that Harris had to prove, on a balance of probabilities and not merely on a prima facie basis, that Rees owned or controlled the trust assets. If a lifting of the veil of a trust were to be argued in tax litigation between SARS and a trustee, arising out of an assessment in which the trustee was taxed on the basis that assets and income of the trust were his own, the onus of course would be significantly different. In terms of the Income Tax Act 58 of 1962, the onus would be on the trustee to prove that the assessment was wrong. This may compel the trustee to produce the kind of documentary records that Harris, in the litigation discussed above, was unable to compel Rees to produce, and which may have shown that the trust was indeed the latter’s alter ego.