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Tackling Cross-border Trusts

Wednesday, 30 November 2011   (0 Comments)
Posted by: Author: Tim Desmond
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Tackling Cross-border Trusts

Where are they taxable?

The Western Cape High Court recently delivered judgement in respect of an application for declaratory relief by a Mauritian trust company.That company was the sole trustee of a Mauritian trust.The application arose out of a dispute with SARS turning on whether the trust had its place of effective management , or alternatively a permanent establishment, in South Africa.SARS had taken the position that the trust was subject to income tax in South Africa (on the alternative bases mentioned above).

The amount assessed was some R1.5 billion. SARS had then taken the step of appointing the trust's South African bank as an agent in terms of Section 99 of the Income Tax Act. An amount of R20 million had consequently been paid to SARS from the trust's South African bank account.

Section 99 of the Income Tax Act represents a powerful collection tool for SARS.It allows SARS to directly collect amounts owing to a person from whom tax is due.A common application of the Section is for SARS to require banks to pay over the balances in defaulting taxpayer's bank accounts.SARS has, however, sometimes been criticised for using the Section in circumstances where it is not warranted.

In this case, an application for declaratory relief was sought on several issues.The Court was asked to find that the trust was not a resident of South Africa and did not have a permanent establishment in South Africa.The court was then asked to order that the R20 million be repaid by SARS.The court declined to find that the trust was not resident and did not have a permanent establishment in South Africa.The issues were found to involve questions of fact as well as law, and that these would be properly dealt with by the Tax Court.

The court also declined to order SARS to make the requested R20 million refund. It did find that SARS had acted prematurely in effecting the agency appointment before the due date for payment of the tax in question.There was,however, sufficient interest that was found to be already due to SARS and, in any event, by the time the application was heard the due date for the tax had arrived. It was mentioned that there may, at best,be a damages claims against SARS in respect of its early seizure of the R20 million.

Source: By Tim Desmond (Tax breaks)



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