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FAQ - 30 August 2017

Thursday, 31 August 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is a withdrawal from a trust by an individual subject to tax?

Q: What is the tax implication on an individual if they withdraw funds from a trust? The trust sold shares it held in a company. The trust has only two trustees and no beneficiaries.

A: The part you refer to was quoted by SARS and was taken from a tax case (ITC 1275 as we indicated).  The President of the Tax court, Judge van Winsen, said: 

“Now, I have no doubt that if appellant was carrying on the business of dealing in shares and securities some of the deductions he claims could well be allowed even if not to the extent he claims. But that is not the position we are dealing with here. The law does not allow a taxpayer who derives a portion of his income from investments to deduct from his income expenses he incurs in watching over those investments, however wisely incurred those expenses may be. Section 11 of the Income Tax Act contemplates deductions from income derived from the carrying on of a trade. See such cases as ITC 512, 12 SATC 246 and ITC 957, 24 SATC 637. Appellant did not even claim to be carrying on the business of investing in equities and other interest-bearing securities, nor in my opinion could he on the face of the evidence before the court have done so.” 

In order for the taxpayer to make a deduction it is necessary that the taxpayer must be able to meet the burden of proof that a trade was being carried on, and that the amount of the expense was incurred in the production of the income.  Whether the holding company carries on a trade will therefore depend on the activities it carries on. 

Trade is a defined term and it has been held that it must be given a wide interpretation.  See also the Burgess case.  In CSARS Mobile Telephone Networks Holdings (Pty) Ltd (966/12) [2014] ZASCA 4 (7 March 2014), it was accepted that the holding company carried on a trade – in respect of its interest income.  It was not discussed with regard to the dividend income. 

2. Will interest paid into an offshore account due to an individual who has left South Africa be subject to tax?

Q: Our client immigrated to Panama on 25 April 2017. In the beginning of April, all the investments that they had in a trust, was paid into his personal SA account. On this account, interest was earned from April to August, where it was then transferred to an offshore account. My question is, will the interest earned be taxable as he is no longer in SA even though it is still an SA account? And secondly, will he be liable for capital gains tax distributed from the trust to him?

A: We accept that the individual, ceased to be a resident of the RSA on 25 April 2017 and that the client’s year of assessment then ended on 24 April 2017 (see section 9H(2)(b) of the Income Tax Act). 

The interest that accrued on the account, for the period until 24 April 2017, would then constitute gross income of a resident of the RSA and would be subject to tax accordingly – the assessment covering the period 1 March 2017 to 24 April 2017. 

There is no tax treaty between the RSA and Panama.  The interest that accrued to the individual from 25 April 2017 until it was paid, will be gross income (it accrued to a person not resident in the RSA and is from a source in the RSA – see section 9(2)(b) of the Act).  We don’t know if the interest was paid by a bank, but from the detail provided, the individual will not qualify for the section section 50D(1)(c) exemption.  Principally because the individual “was physically present in the Republic (RSA) for a period exceeding 183 days in aggregate during the twelve month period preceding the date on which the interest is paid”.  For the same reason section 10(1)(h) will not apply and a return of income will be required.  You gave no information to the contrary. 

To be able to comment on the amount vested by the trust we will need to know if it came from ‘income’, a capital gain (gains), or trust capital.  It is only where it is from trust capital that there will be no tax consequences for the beneficiary. 

Remember that a capital gain may well have resulted from the fact that he ceased to be a resident of the RSA.  

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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