Receipt of Foreign Assets and the Subsequent Donation Thereof to a Non-resident Trust

Binding Private Ruling 157 dealt with the income tax consequences arising from, and the attribution rules applicable to a distribution of foreign assets made by non-resident discretionary trusts to a beneficiary who is a resident of South Africa, and the subsequent donation by the beneficiary of such assets to another non-resident trust.

The parties to the transaction were as follows:

• ‘The Applicant’: a natural person who is a resident of South Africa.
• ‘Trust A’: a non-resident testamentary discretionary trust.
• ‘Trust B’: a non-resident discretionary trust.
• ‘Trust C’: a non-resident trust to be founded by the Applicant.
• ‘Company A’: a non-resident company.
• ‘Company B’: a non-resident company.

The Applicant is a beneficiary of Trusts A and B. Trusts A and B held all the shares in Companies A and B. It was proposed that Trusts A and B will, in due course, distribute certain foreign assets in the form of loan accounts, cash reserves and shares to the Applicant. Upon receiving the distributed assets the Applicant intended to donate them to Trust C. Company B is not dealt with further in the ruling.

Ruling made in connection with the transaction: 

Trusts A & B’s distributions to the Applicant

• The distribution of Trust A’s shares held in Company A and Trusts A and B’s loan account in Company A to the Applicant fell outside the ambit of section 25B(1), (2) and (2A) of the Income Tax Act.
• The provisions of paragraph 80 of the Eighth Schedule to the Income Tax Act did not apply to the distributions of the loan account and shares to the Applicant. The base cost of the loan account and shares in the Applicant’s hands will be equal to the face value (or market value) of the loan and shares respectively as at the date of distribution in terms of paragraph 20(1)(h)(vi) of the Eighth Schedule.
• Similarly the distribution of Trust B’s cash reserves to the Applicant fell outside the ambit of section 25B(1), (2) and (2A).

Section 25B of the Act is the principal taxing section that relates to trusts. This section provides that (subject to certain other provisions) the income of a trust is taxed either in the trust or in the hands of the beneficiaries. South African taxpayers should be mindful of implications of section 25B when determining the liability for tax in respect of trust income.

Applicant’s subsequent donations to Trust C

• The Applicant’s donation of the foreign assets to Trust C was exempt from donations tax under the provisions of section 56(1)(g)(ii) of the Income Tax Act.
• Section 7(8), read with section 10B(2)(a), would apply to the donation of the Company A shares to Trust C.
• Section 7(8) would apply to the donation of Trusts A and B’s loan accounts to Trust C as well, to the extent that any interest was charged or any obligation exists to pay interest on these loans.
• Section 7(8) would also apply to the donation of Trust B’s cash reserves to Trust C to the extent that any interest is earned on such reserves, or from any amounts arising in Trust C as a result of the utilisation of such funds for the purchase of an income–generating asset.
• The application of section 7(8) to the loan accounts and cash reserves above will be limited to the amounts generated in Trust C, as a result of the donation of the foreign assets by the Applicant, and it will not apply to any amounts generated in or by Company A.

Section 7(8) deems any amount to be the income of a resident if such amount is received by or accrues to a non-resident in consequence of a donation, settlement or other (gratuitous) disposition made by the resident, and such amount would have been included in the non-resident’s income had he been a resident.

This section however does not apply to a donation, settlement or disposition made to a non-resident which is an entity which is similar to a PBO or income (e.g. from a donation) received by a CFC in relation to the resident donor.

Unfortunately this Binding Private Ruling does not specify the reasons why neither section 25B nor paragraph 80 do not apply to the distributions of the shares and loan account by the trust. 

This article first appeared on bdo.co.za.