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Application of withholding tax on interest to distributions from a trust

Friday, 14 March 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

The answer to this query is based on legislation as at 14/03/2014.

Q: I’m looking for some assistance with regard to the application of the withholding tax on interest in the following circumstances: 

1) A trust holds an interest bearing investment in a SA bank and earns interest during the year of assessment.

2) The trustees exercise their discretion and distribute a lump to a non-resident contingent beneficiary of the trust.

3) Applying the conduit principle embedded in section 25B a portion of the lump sum comprises interest earned by the trust from the interest investment. Is the distribution a ‘payment to or for the benefit of a non-resident’ for purposes of section 50B? If yes, would you concur that the ‘payment’ is made by the trust and not the bank despite the conduit principles contained in s25B? (I’m trying to establish whether the section 50D exemption applies).


A: There are a few concerns:

1.) I am not certain whether the trust "paid” the interest but I think rather the trust "distributed” the interest. I think that the borrower has paid the interest regardless. It can be a case where the bank pays the trust on behalf of a beneficiary with a vested right to the interest and the interest is then paid to the benefit of the non-resident. Let’s assume that the trust is the person paying and not merely distributing the interest, then one has to consider whether the conduit principle will apply (interest from bank which qualifies for the s 50D exemption) or, on the other hand will it retain its identity as interest but lose the identity of the nature of the person paying the interest.

2.) If it is the case that only the borrower can pay the interest, then this might leave some scope for formulating a scheme to get past the payment of withholding tax where the borrower is not a bank. The borrower pays interest to a resident trust, the trust claims certain deductions and makes a distribution of capital to a non-resident. I don’t however expect this to be a problem as non-residents are currently exempt from the payment of tax on interest earned in terms of s 10(1)(h), and the SA trust will pay tax on the interest.



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