Appointing new beneficiaries of a trust

ITC 1828 70 SATC 91 is not a new tax case. However, it is an interesting case, which highlights some of the potential tax implications that may be triggered upon the appointment of new beneficiaries to a trust, particularly, a discretionary trust.

In ITC 1828 70 SATC 91 a discretionary trust (trust) had been established with the object of benefiting the founder, the founder’s wife and the children, being the discretionary income and capital beneficiaries. The trust had acquired certain immovable property in 1995 and in 1997 the trust and a third party (the purchaser) signed an offer to purchase the property. However, the offer to purchase was subsequently cancelled. Instead, it was decided that:

  • The purchaser would discharge the indebtedness of the trust to its various creditors and pay an amount of money to the founder for the loan claim against the trust. The payment to the trust’s creditors and the founder equalled the purchase consideration that would otherwise have been paid by the purchaser for the property had it been acquired in terms of the offer to purchase;
  • Against payment of the above amounts, the existing beneficiaries of the trust agreed that they would take the necessary steps to ensure that they were no longer trustees and beneficiaries of the trust and the purchaser, together with his nominees, were appointed trustees and the Purchaser was also appointed as the beneficiary of the trust.

The South African Revenue Service (SARS) argued, and the court agreed, that, viewed holistically, the agreements in issue constituted a transaction contemplated in the Transfer Duty Act, No 40 of 1949 (TD Act) and transfer duty on the value of the property was payable. It was held by the court that the purchaser had entered into a series of transactions whereby the outgoing beneficiaries lost all of their rights in the trust and the incoming beneficiary (the purchaser) acquired those rights lost by the outgoing beneficiaries.

The purchaser thus, de facto, acquired ownership of the property forming the subject of the trust, which constituted a ‘transaction’ for purposes of the TD Act.

The definition of a ‘transaction’ in the TD Act has subsequently been amended to specifically include the substitution or addition of one or more beneficiaries with a contingent right to any property of a discretionary trust. However, it is still interesting to note the following:

  • The court accepted that in law, beneficiaries may consent to amend a trust deed and, in certain circumstances, may even consent to bringing an end to a trust. In effect, beneficiaries can vary the trust to set-up a new trust that differs from the old trust; and
  • Based on the facts in ITC 1828, a new trust had in fact been created in view of the fact that the object and purpose of the old trust (as envisage by the founder) had come to an end.

The income tax and capital gains tax (CGT) implications for trusts and trust beneficiaries are complicated and depend on, amongst others, the nature of the trust concerned (eg a vesting or discretionary trust). From a CGT perspective, it is generally accepted that the appointment of new contingent/discretionary beneficiaries by the trustee of a discretionary trust, will not give rise to a disposal by the trust or the beneficiaries. However, where the appointment of new contingent beneficiaries results in the object and purpose of a trust coming to an end, there may in fact be a ‘disposal’ by the ‘old trust’ to the ‘new trust’ for CGT purposes. If that is the case, one would have to consider whether the deemed disposal at market value rules, contained in paragraph 38 of the Eighth Schedule to the Income Tax Act, No 58 of 1962, may be applicable (see page 78 of SARS’s Comprehensive Guide to Capital Gains Tax (Issue 4)).

One should therefore be mindful that if beneficiaries of a trust vary the object and purpose of the trust to such an extent that a different ascertainable object and purpose has been effected, a new trust may come into existence, which may trigger tax implications for the trust and/or its beneficiaries.

Author:

  • DLA Cliffe Dekker Hofmeyr
  • Andrew Lewis