Trusts – Distributions from and donations to foreign trusts

tax ethicsOn 18 November 2013 the South African Revenue Service (SARS) issued Binding Private Ruling 157 (BPR).
The Applicant, a natural person and resident in South Africa, was a beneficiary of two non-resident discretionary trusts A and B. Trusts A and B held various foreign assets such as loan accounts, cash, and shares. Specifically, trusts A and B held all the shares in non-resident companies A and B.

It was proposed that trusts A and B would distribute certain of their foreign assets to the Applicant. Upon receipt, the Applicant would donate the assets to a non-resident trust C.

SARS made the following ruling in respect of the tax consequences relating to the above proposed transaction.

In respect of the loan accounts, cash and shares SARS ruled that sections 25B(1), (2) and (2A) of the Income Tax Act No. 58 of 1962 (the Act) would not apply to the distribution. It is assumed that this is so because these assets are essentially capital assets. It is further also assumed that the assets do not constitute capitalised revenue from prior years of assessment as contemplated in subsection (2A).

In respect of the loan accounts and shares, it was also ruled that:

  • Paragraph 80 of the Eighth Schedule to the Act would not apply to the distribution (presumably because the disposal by the foreign trust would not trigger a gain for the trust in South Africa, and the Applicant will become entitled to the assets and not any gain or any amount representing a gain).
  • The base cost of the assets in the hands of the Applicant should be determined by paragraph 20(1)(h)(vi) of the Eighth Schedule, in terms of which the base cost would be equal to the market value of the assets on the date of distribution. It is interesting to note that, by implication, SARS ruled that the distribution is one governed by paragraph 38 of the Eighth ScheduleĖ that is, that the distribution would constitute either a disposal by way of donation, that the consideration was not measurable in money, or that the parties are connected persons and the price was not an armís length price.

In respect of the donation of the assets by the Applicant to trust C, SARS ruled that:

  • The donation would be exempt from donations tax in terms of section 56(1)(g)(ii). The implication here is that the Applicant either acquired the assets (situated outside South Africa) by inheritance from a person who, at the time of death, was not a resident, or by way of donation from a person who was not a resident at the time of donation. In other words, the distributions by trusts A and B to the Applicant will be seen as either an inheritance or a donation.
  • The attribution rule contained in section 7(8) of the Act will apply. That is, income received by trust C that is attributable to the donation will be attributed to the Applicant. In this regard, and in respect of the shares, the Applicant could claim the foreign dividend exemption contained in section 10B(2)(a) of the Act should the 10% participation interest be met. In respect of the loan accounts, any interest on the loans will be attributed to the Applicant. In respect of the cash, interest earned on the cash or amounts arising from investing the cash in an income-generating asset will be attributed to the Applicant.

The ruling is valid for a period of three years.

Cliffe Dekker Hofmeyr

ITA:Sections 7(8), 10B(2)(a), 25B, 56(1)(g)(ii), Eighth schedule Paragraphs 20(1)(h)(vi)and 80