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Are non-resident beneficiaries taxable on the capital distribution from a resident trust?

Wednesday, 17 June 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Will non-resident beneficiaries be liable for tax on the capital distribution from a resident trust?

The trust has 2 beneficiaries who has a vested right on the Capital of the trust on termination. The trust is in the process of being terminated and all the listed shares held has been sold and the capital is to be distributed to the non-resident beneficiaries. The question is, as the beneficiaries had a vested right in the capital, did they effectively "own" the shares due to the vested right, and therefore not liable to pay tax on the capital profit or are they liable because the shares was owned and sold by the trust and the CGT distributed to them?

I know that non-residents are only liable for CGT in respect of immovable property sold in SA and not on the sale of shares in a share portfolio. I am of the view that as they did not own the shares directly, and the shares were sold by the resident trust and the capital gain distributed, that it should be taxable as a CGT distribution.

A: In terms of the Eighth Schedule to the Income Tax Act non-resident beneficiaries are treated differently to resident beneficiaries.  Paragraph 80(2) (that applies to your request) specifically mentions that the so-called attribution of the gain is only made to ‘a trust beneficiary who is a resident’.  SARS explains their view as follows (in the CGT guide):

"The intention of the legislature in not providing for attribution to non-resident beneficiaries was to prevent loss to the fiscus, since non-residents are only subject to CGT on a limited range of assets (immovable property in South Africa and assets of a permanent establishment in South Africa). The capital gains are derived by the trust and are clearly within South Africa’s taxing jurisdiction. South Africa has a right to keep such capital gains within its jurisdiction by only permitting attribution to resident beneficiaries. There is accordingly no question of discrimination against non-resident beneficiaries. The legal maxim expressio unius est exclusio alterius supports the view that by specifically only mentioning a resident beneficiary in para 80(1) and (2) the legislature intended to exclude non-resident beneficiaries.”

The result of this is that the gain will be taxed in the trust. 

You say that the beneficiaries have "a vested right on the capital of the trust on termination” and our guidance therefore assumed that this vested right was only acquired after the disposal.  They therefore did not "effectively "own" the shares” as you say – see paragraphs 11(1)(d) and 13(1)(a)(iiA) of the Eighth Schedule.  

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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