CONCEPT OF ATTRIBUTION



A trust is a separate juristic entity. It is usually set up with a certain purpose in mind, usually to provide for various beneficiaries of the trust. The trust has trustees that administer the trust on behalf of the beneficiary or beneficiaries.There are two types of trusts for taxation, a special trust and trusts. Special trusts are set up to take care of a disabled person and are taxed as an individual. Other trusts have the following rules that are applied to them:Trusts are taxed at a rate of 40% fixed for all levels of income. No interest exemptions can be claimed by the trust. Trusts have a February year end.Trusts are subject to a 50% inclusion rate for CGT and do not receive the annual exclusion applicable towards CGT for individuals.TAXATION OF TRUSTS – AN INTRODUCTIONWhy create a trust?Income tax savingBeneficiaries may pay less tax than the donor.Consider a person who places R100,000 income in a trust. If taxed in their hands at maximum marginal rate, tax of R40,000 would be paid. In the beneficiaries hands, tax of 18% X R100,000 = 18,000 less the primary rebate would be paid if the beneficiary had no other incomeEstate duty savingTrusts do not die. Human beings die. Thus if a growth asset is placed in trust, the growth of the asset upon the death of the individual will not be subject to estate duty or CGT on death.Consider shares placed in a trust when worth R1,000,000 and worth R15,000,000 upon death. Estate duty of R14,000,000 X 20% will be saved.Reduction of insolvency riskThe assets held by a trust may in many circumstances not be affected if a person is declared insolvent. Trusts therefore reduce insolvency risk.The taxable income of a trust may be transferred to another person. In SA tax law, the following persons may be taxed on income earned from a trustBeneficiaries if they have vested rights and section 7 of the Act does not applyDonors in terms of section 7 of the ActThe trust if there is no donor, or the donor is dead and no beneficiary has a vested right.KEY TRUST CONCEPTS THAT NEED TO BE UNDERSTOODWHAT IS A CONTINGENT RIGHT?A contingent right exists where an amount does not vest in any beneficiary. This happens when the vesting is dependent on a future uncertain event.Thus if a person will receive R1,000,000 when they turn 18 and if they die prior to turning 18, the amount will vest in the SPCA, the person will only have a contingent right to the R1,000,000. Similarly the SPCA also only has a contingent right.WHAT IS A VESTED RIGHT?A vested right occurs where a beneficiary will receive an amount notwithstanding any condition (even if the person was to die)Thus if a person will receive R1,000,000 when they turn 18 and if they die prior to turning 18, their estate will receive the R1,000,000, this will be a vested right as notwithstanding the condition, the R1,000,000 vests in that person..CONDUIT PIPE PRINCIPLEThe conduit pipe principle applies to amounts distributed by trusts.The conduit pipe principle means that the amount distributed by a trust retains its identity when it is received by the beneficiary. Thus rentals distributed by the trust to the beneficiary will be taxed as rentals in the hands of the beneficiary. Interest distributed by the trust to the beneficiary will be taxed as interest in the hands of the beneficiary. (CIR v Armstrong and CIR v Rosen)Section 10(2) states that dividends distributed within an annuity will not qualify for the section 10(1)(k) dividend exemption, nor will interest qualify for the section 10(1)(h) deduction for foreigners who do not carry on business in SA and are outside of SA for > 183 days in a tax year..Beneficiaries can get vested rights from two sources:The first source is the trust deed. A trust deed may give a beneficiary rights to income in a trust.The second source is where the trustees have discretion to give beneficiaries income and the beneficiaries are given such income by the trustees. When a beneficiary has a vested right, the amount due to him will belong to him and the beneficiary may be taxed on such amount.ILLUSTRATIVE EXAMPLE 1Mr A is 16 years old and is alive for the whole year. He is the beneficiary of a trust that distributes amounts to him and his sister, Miss A, who was also alive for the whole year. The trust earns rental income, interest income and dividend income. These were all earned from assets given to the trust when their father passed away 3 years ago.The trust deed states that an amount of R1,000 per month be paid from rentals to Mr A whilst he is alive. Mr A is alive for the whole year. The trust deed states that an amount of R1,200 per month be paid to Miss A.The trust deed states that the trustees may distribute amounts subject to their discretion. The trustees decide to distribute R2,000 per month out of rentals to Mr A. Remaining rentals of R50,000 were not distributed by the trust. The trust deed states that the rentals will be accumulated in the trust until Mr A’s 25thbirthday and will then be distributed to all surviving beneficiaries at that date. If there are no surviving beneficiaries alive, it will be given to the SPCA.Interest of R15,000 was received by the trust and the trust deed stated that it was to be distributed in equal portions to the 2 beneficiaries.Dividends of R100,000 were received by the trust. The trust deed stated that R3,000 of the dividend be distributed monthly to each beneficiary. The balance is to be accumulated in the trust and distributed to both beneficiaries on 17 March 2015. If any beneficiary passes away, the amount will be given to their estate.Calculate the amount of taxable income of Mr A assuming he has no other income other than that specified in the question. SUGGESTED SOLUTION TO ILLUSTRATIVE EXAMPLE 1It should be noted that the donor cannot be taxed as he is dead for the whole year of assessment.1Rentals from trust deedMr A has a vested right from the trust deed12,0002Rentals from trust deedMiss A has a vested right and such amount is taxed in her hands03Rentals from trustees discretionThe trustees by exercising their discretion and giving R2,000 per month to Mr A have given him a vested right. 24,0004Remaining rentalsNo beneficiaries have a vested right and such amount will be taxed in the trust5InterestInterestInterest exemption 7,500(7,500)6Dividend received in the form of a monthly annuityWhen dividends are received in the form of an annuity, the dividend exemption does not apply. 36,0006Dividend retained in trustMr A has a vested right to half of the retained dividend.Dividend [100,000 – (36,000 X 2)] X 50%Dividend exempt – exemption applies as not received via an annuity.14,000(14,000)TAXABLE INCOME72,000STEPS IN CALCULATING THE TAXABLE INCOME OF A TRUST, DONOR OR BENEFICIARIESStep 1Is there a donation or other similar disposition?An interest free or low interest loan will constitute a similar disposition to a donation as the transaction is not at fair value. Similarly selling an asset below market value will have a donations element as well.NoYesStep 2BIf the beneficiary has a vested right to the amount, the amount is taxed in the beneficiary’s hands subject to normal tax rulesIf the beneficiary does not have a vested right, the amount is taxed in the hands of the trust.The donor can either be dead for the whole year or part of a year.For the part of the year the donor is alive, use, the rules belowfor step 3.For the part of the year the donor is dead, the rules to the right of this box should be applied for step 2B.Step 2AIf a donation, gratuitous settlement or similar disposition has been made, it should be ascertained whether the donor is alive or deadThe donor is deadThe donor is aliveStep 3Does the beneficiary have a vested right to the amount?Step 3BIf the beneficiary has a vested right, the donor is taxed on the income received if section 7(2),7(3),7(4),7(6),7(7) or 7(8) apply. Section 7 contains7(2) donations by one spouse to another7(3) donation by a parent to a minor child7(4) cross donation from parent to third party, who in turn donates to the minor child of the parent7(6) donor retains the right to change the beneficiary7(7) income is ceded for a period of time7(8) income is given to a non residentIf these sections above do not apply, the income is taxed in the hands of the beneficiary as the beneficiary has a vested right..Step 3AIf the beneficiary does not have a vested right, section 7(5) applies.The donor is taxed on the income retained in the trust provided thatThe donor is aliveThe beneficiary does not have a vested rightThere is a stipulation in the trust deed.SECTION 7 SUMMARYWhat is needed for this section to apply?How does this section work?Students should watch out for these complications7(1)Income is deemed to accrue to or be received by the beneficiary if the beneficiary has a vested right to income or retained income. 7(2)Donation or gratuitous transaction from one spouse to another spouse with the specific intention of transferring income from one spouse to another.This section will not apply if the intention was something else.If a spouse makes a donation or gratuitous transaction, and the surviving spouse receives income as a result of the donation, the amount so received by the spouse may be taxed in the hands of the spouse who made the donation if the intention was to transfer income.If the purpose was not to transfer income, the income is taxed in the hands of the spouse who received the donation.Are the couple married in or out of community of property? If married in community of property, maybe only half the property is donated as the other half is already owned by the spouse receiving the donation. 7(3)Donation or gratuitous transaction from a parent to their own minor child or their minor stepchild.This section will not apply in other instances with minor children such as when a grandfather donates income to a minor grandchild as the grandchild is not their own minor child.If a parent makes a donation that benefits their minor child, the amount of income so received by the minor child as a result of the donation will be taxed in the donors hands* notwithstanding the fact that the child has received the income.A minor child is a child that is under 18 years of age. A person ceases to be a minor if they turn 18 in a year or get married in a year or if they become legally emancipated in a year. In such a year, section 7(3) will apply whilst they are still a minor and will cease to apply when they become a major.This section applies to your own children, adopted children and stepchildren.7(4)Donation or gratuitous transaction from one parent of a minor child to a 3rd party. The 3rd party then donates something which results in income being received by the minor child of the original donorIf I donate to your child and you donate to my child, we can avoid section 7(3). However section 7(4) deems the income from a cross donation to be taxed in the hands of the donor.This also applies if you donate to a third party who in turn donates to your minor childrenSimilar points as for section 7(3) as section 7(4) only applies to minor children.7(6)Donation or gratuitous disposition where the donor retains the right to change the beneficiary rights to the income that donor has donated to the trust.If a donor has the right to change a beneficiary as regards income from a donation that has been made by him/her, the income distributed to beneficiaries will be taxed in the hands of the donor whether or not the donor has changed the beneficiary. This right to revoke income only applies to income that the donor has donated to the trust. Thus if a person has a right to revoke rental and interest income from a beneficiary, but only donated the rental income, the rental income distributed to the beneficiary will be taxed in the donors hands. The interest income, notwithstanding the fact that someone has a right to revoke, will not be taxed in the persons hands as that person that has the right to revoke as he never donated such amounts to the trust.7(7)A donor has ceded income for a period of time. An example of this is where a donor gives the usufruct over a block of rental flats to his brother for 10 years after which the block of flats will revert back to the donor. As a result of this, the brother and not the donor will receive rental income from the flats. The income given to the cessionary by the donor will be taxed in the hands of the donor. Using the example of the donor giving the usufruct over the flats to his brother, even though the brother received the rental income from the flats, the donor will include the rental income and expenses into his taxable income.It is often difficult to identify such cessions of income.Look out for the following phrases to identify cession:UsufructGive income away for ? yearsGive right of use for ? years Where the whole asset (and not the usufruct) is donated, one of the other sections needs to be used.7(8)A donation or similar disposition has been made where a non resident has received income as a result of the donation or similar disposition.The income received by the non resident is taxed in the hands of the donorWhen a person emigrates from South Africa, this section will only apply from the date that the person emigrated from South Africa.The following should be notedSection 7 applies to amounts distributed from trusts that a donor donated to. Thus if a donor donates an asset to a trust, and the asset generates income that the trustees give to the minor child of the donor, the donor will be taxed on the income and not the minor child in terms of section 7(3).It also applies if there is no trust and a donor donates directly to a third party. Thus if a donor gives his minor child a house, and the minor child earns rental income from the house, section 7(3) will tax the rental income in the hands of the donor.If donor dies, section 7 no longer applies as the donor cannot be taxed. The donor will be taxed in terms of section 7 up till the date of death and will not be taxed on any income earned after the date of death.If donor is married in community of property and a donation is made from the joint estate, half the donation is made by the one spouse and the other half by the other spouse. Section 7 will be applied to each spouse on 50% of the income that is subject to section 7.If property is sold to a trust for fair value, with no low or interest free loans, the section 7 will not apply to the income from the property so sold. This is because there is no donation or similar gratuitous disposal and section 7 applies only to donations and similar dispositions.EXAMPLES OF SECTION 7ILLUSTRATION SECTION 7(2)Mr A donates R100,000 to a trust. The trust earns R10,000 interest and distributes this amount to Mrs A. Mrs and Mrs A are married out of community of property. What are taxation implications of the above? Assume the donation was made to avoid tax.SUGGESTED SOLUTIONThe R10,000 will be taxed in the donors hands. Mr A will include R10,000 into his gross income. Provided he has not yet used his interest exemption, such interest exemption may be set off against the interest income.If the donation was not made to avoid tax, it would be taxed in the wife’s hands.ILLUSTRATION – SECTION 7(3)Mr. B donates government bonds into a trust. In terms of the trust deed, all interest earned by the trust is to given to his two children, Sam (23 years old) and Juliet (15 years old), in equal proportions. The trust earned interest of R10,000 evenly through the year. The children have vested rights to income. What are the taxation implications?What would the taxation implications be if Mr A were to die midway through the tax year?SUGGESTED SOLUTIONPart aBoth Sam and Juliet have vested rights to the interest earned.Sam will be taxed on the interest in his own hands as he is not a minor and as such, s7(3) does not apply.Juliet has received R5,000, but will not be taxed on such amount as her income was earned as a result of her father donating assets into a trust of which she is a beneficiary. Mr. A will be taxed on the R5,000 income. Part bIf Mr. A were to die half way through the year at which stage Juliet had received R2,500 interest, that R2,500 received by him will be taxed in his hands. The remaining amount received by Juliet would be taxed in her hands as section 7(3) of the Act no longer applies as the donor is dead.ILLUSTRATION – SECTION 7(4)Mr. A gives R500,000 to Mrs C. Mrs C invests this income and earns R80,000 from the investment. Mrs C gives half of the profits of her business to Mr A’s minor children. The children of Mr A receive R75,000 from the partnership previously owned 100% of Mrs C.What are the taxation implications?SUGGESTED SOLUTIONSection 7(4) deems that the income will be taxed in the parents’ hands in such a scenario.Thus the income earned by Mr A’s children will be taxed in Mr A’s hands. The full R75,000 will be taxed in Mr A’s hands.ILLUSTRATION – SECTION 7(5)A trust was set up by the will of the late Osama Bin Laden. In terms of the trust deed, Income is to be retained in the trust until 1 January 2015 when it will be paid out to beneficiaries. Trustees have the discretion to distribute additional amounts as they deem necessary.Mr Obama donates a bond to a trust. The interest on the bond is R20,000 for the year.Discuss the taxation implications for the tax year if:no-one has any vested rights to the interestMr Bin Shot has a vested right to the interest. Mr Bin Shot is Mr Obama’s brother in law.Master Obama, Mr Obama’s minor child has vested rights to the interest.Mrs Obama, Mr Obama’s wife has vested rights to the interest. Mr A donated the amount to her to avoid tax.Mrs Bush, Mr Obama’s ex wife has vested rights to the interest. Mr Obama and Mrs Bush were divorced three years ago.Mr Quaeda has a vested right to 25% of the interest. Mr Quaeda is Mr Obama’s nephew.Mr Obama passed away prior to the current tax year and no person has a vested right to the income earned by the trust.Assume in all cases, there is a stipulation in the trust deed.Suggested solutionPart aAs a donation has caused income to be earned in the trust,the donor is not deadthe income does not vest in any beneficiary, and there is a stipulation in the trust deed, section 7(5) will require the income of R20,000 to be taxed in the hands of the donor. Thus R20,000 will be taxed in the hands of Mr ObamaPart bVested rights override section 7(5). The full R20,000 will be taxed in the hands of Mr Bin Shot. (Note that sections 7(2), 7(3), 7(4), 7(6), 7(7) and 7(8) do not apply. Mr Bin Shot can also apply the interest exemption in terms of s10(1)(i) if it has not yet been utilized.Part cVested rights override section 7(5). The full R20,000 will be taxed in the hands of Mr Obama, not in his son’s hands as section 7(3) applies.Mr Obama will be able to utilize the interest exemption if appropriate.Part dVested rights override section 7(5). The full R20,000 will be taxed in the hands of Mr Obama, not in his wife’s hands as section 7(2) applies. Again, please note that the interest exemption will be applicable, if appropriate.Part eVested rights override section 7(5). The full R20,000 will be taxed in the hands of Mrs Bush. Section 7(2) does not apply if the couple are divorced.Mrs. Bush can utilize the interest exemption, if appropriate.Part fVested rights override section 7(5). However there is only a vested right to 25% of the interest i.e. R5,000. R5,000 will be taxed in the hands of Mr Quaeda. Section 7(5) will apply to the amount that does not have a vested right, and the R15,000 will be taxed in the hands of Mr Obama, the donor. The interest exemption is available, if appropriate.Part gAs the donor is no longer alive, section 7(5) cannot apply. There is no vested right. The amount will be taxed in the hands of the trust.Note that the trust cannot utilize the interest exemption as the trust is not a natural person.ILLUSTRATION – SECTION 7(6)Mr. C donates assets to a trust for the benefit of his children. The trust deed stipulates that the right to income shall be determined by him, and he has the right to revoke income as envisaged by section 7(6). The trust earns R15,000 income and R10,000 is distributed to Mr A’s major child, Steven, who is 25 years old. Undistributed amounts are not vested in beneficiaries. What are the taxation implications if all R15,000 income resulted from Mr C’s donation?Will the solution to part a change if Mr C donates money that earns R6,000 interest and his brother donates money that earns R9,000 interest.SUGGESTED SOLUTIONPart aIf the trust earns income of R15,000 in respect of that donation, and R10,000 is distributed to the beneficiaries, the following taxation effects would result:the R10,000 would be taxed in Mr. C's hands as envisaged by section 7(6) as it is income paid out to beneficiaries where the donor retained the right to revoke income.The R5,000 does not vest in Steven. the R5,000 could not be taxed in Mr. C's hands under section 7(6) as it has not vested in a beneficiary. However it still may be taxed in Mr. C's hands in terms of section 7(5) because of the stipulation. Part bR6,000 of the amount paid to the major child will vest in the major child. (9/15 X R10,000). This is because the person who has the right to revoke income did not donate the assets to which the income relates.R4,000 will be taxed in the hands of Mr C in terms of section 7(6). (6/15 X R10,000).The undistributed amounts may be taxed in the hands of the donors in terms of section 7(5). ILLUSTRATION – SECTION 7(7)Mr. A donates the use of a block of flats to ABC Trust for 10 years. The trust rents out the flats for R100,000 during the year. The trust distributes R40,000 to Jeffrey, the donor’s major son and keeps the remainder. What are the taxation implications?SUGGESTED SOLUTIONMr. A will include the full R100,000 in his income as he retains ownership of the block of flats. ILLUSTRATION – SECTION 7(8)Mr A donates R500,000 to a trust. The amount is invested by the trust and R50,000 income is earned by the trust. The R50,000 is given to Mr B, a non resident, that is not related to Mr A. The amount is given at the trustees discretion.What are the taxation implications?SUGGESTED SOLUTIONAs the amount has been distributed to a non resident, the amount of R50,000 is taxable in the hands of the donor, Mr A.CONCEPT OF ATTRIBUTIONThe Income Tax Act raises the concept of attribution. Attribution considers whether a limit should be placed on the amount of income and capital gain transferred from the “beneficiary” to the donor. Consider the followinga mother has a minor son of 16 years old who is a genius on the stock exchangeshe lends R1,000,000 interest free to her son on 1 April.Her son trades actively with the money and at 1 October has R2,300,000 in equity. At this date, the R1,000,000 is repaid back to his mother.Had the mother not given the money to her son, she could have invested the money in the bank earning 10% interest.The son has earned money due to 2 reasonsThe loan given by his mother andHis own ability in investing on the stock exchangeAttribution works on the following basis:If the money was placed in a bank, the mother would have earned 1,000,000 X 6/12 X 10% = R50,000This is called an attribution limit and this is the most the mother can be taxed on.R50,000 income will be taxed in the hands of the mother as per section 7(3) and the remaining R1,300,000 – R50,000 = R1,250,000 will be taxed in the hands of the son. As can be seen, attribution sets a limit as to the amount of income and capital gains can be “attributed” to the donor.However is attribution supported in law?In terms of case law derived from Woulidgevs CIR, where a donor either makes a donation, or similar gratuitous disposition (such as a low interest or interest free loan), section 7 may apply. The parent may not be taxed on deemed income which exceeds the reasonable market related interest which he could have received had he/she invested that amount. Paragraph 73 of the 8th schedule limits the amount of capital gains that may be “attributed” to a donor.Thus the concept of attribution is supported in law for:Amounts of income received by beneficiaries from donations or similar dispositions ANDAmounts of capital gains received by beneficiaries from donations or similar dispositionsSECTION 25BSection 25B(1)If a trust deed gives a beneficiary a vested right, the beneficiary will be taxed on the amount of income subject to section 7 of the ActSection 25B(3)If a beneficiary has a vested right to income from a trust, the beneficiary will also be allocated the expenditure allocated to that income. Section 25B(5)The loss not utilised by the beneficiary in section 25B(4) may be used by the trust in that same year of assessment.Section 25B(7)If a loss is made that would not normally be deductible in South Africa (such as a loss that would not be deductible in terms of a double tax agreement), this loss will not be subject to sections 25B(4), 25B(5) and 25B(6).Section 25B(6)The loss not utilised by the trust in section 25B(5) may be used by the beneficiary in that next year of assessment.Section 25B(4)If a beneficiary has a vested right to a loss from the trust, the trust loss can only be set off against trust income from that year. Section 25B(2)If the trustees exercise their discretion and give a beneficiary a vested right, the beneficiary will be taxed on the amount of income subject to section 7 of the ActILLUSTRATION – SECTIONS 25B(1) TO SECTION 25B(7)A trust was set up in terms of the will of Stanley Manly. All the assets of the trust were placed in trust in terms of the will.A trust earns foreign rentals of R50,000 and interest of R20,000 in year 1. The trusts also has expenses of R97,000 relating to the rentals and R5,000 relating to the interest. R7,000 of the rental expense cannot be claimed as a deduction in SA due to a double tax agreement. There is one beneficiary, Fred, in the trust who has a vested right to rentals. The interest income can be distributed only at the discretion of the trustees. The trustees did not distribute the interest income. In addition, royalty income earned by the trust of R10,000 was fully distributed to Fred’s brother, Gordon.In the next year, there are rentals of R50,000 and interest of R30,000. Deductions applicable to rentals are R30,000 and applicable to interest are R15,000. Interest again was not distributed by the trustees.Calculate the amount of taxable income of the trust and of the beneficiary for the two years. SUGGESTED SOLUTIONYear 1Section 7 will not apply as Stanley Manly is dead.Expenses deductible are 97,000 – 7,000 = R90,000. The R7,000 cannot be deducted in SA and cannot be used per section 25B(7).The beneficiary will be taxed as follows:Rental included in gross income as beneficiary has a vested right 50,000Expenses related to the vested right per 25B(3) limited to income per 25B(4)(R50,000)Taxable income R NilThe amount of loss carried forward to the trust is R40,000.The trust will be taxed as follows:Interest income included in gross income per gross income definition R20,000Interest expense deductible in terms of the general deduction formula(R 5,000)Taxable income R15,000Loss carried forward from beneficiary and utilised per 25B(5)(R15,000)Taxable income R NilThe amount of loss will be carried forward will be R25,000. It cannot be used by Gordon who will be taxed on the R10,000 royalty income.Year 2The beneficiary will be taxed as follows:Rental included in gross income as beneficiary has a vested right R50,000Expenses related to the vested right per 25B(3) limited to income per 25B(4)(R30,000)Taxable income from trust R20,000Less: Loss c/f from the previous year per 25B(6) limited to taxable income(R20,000)Taxable income R NilThe amount of loss carried forward to the trust is R5,000.The trust will be taxed as follows:Interest income included in gross income per gross income definition R30,000Interest expense deductible in terms of the general deduction formula(R 15,000)Taxable income R15,000Loss carried forward from beneficiary and utilised per 25B(6)(R 5,000)Taxable income R10,000capital distributionsInstead of distributing income to beneficiaries, a trust can distribute capital to beneficiaries.Distribution by a SA trust to beneficiariesSA trusts are taxed on worldwide income and capital gains. As such, any amount retained in the trust has already been taxed in SA in hands of either a donor or the trust. Any capital distributed to a beneficiary is not taxed in the hands of the beneficiary.ILLUSTRATION – SA TRUST DISTRIBUTING CAPITAL TO BENEFICIARIESAs of 31 March, a trust has earned R10,000 interest income. The trust distributes this R10,000 to Barney Dinosaur as well as R50,000 capital that has been retained in the trust in previous year (out of retained income). Assume that the donor of the interest income is dead and section 7 of the Act will not apply. What are the tax implications?SUGGESTED SOLUTIONThe R10,000 will be included in the taxable income of Barney Dinosaur as he has a vested right to the income. The R50,000 capital distributed is not taxed as it is a distribution of capital that was taxed in a previous year.Distribution by a non resident trust to beneficiariesNon resident trusts do not pay tax on worldwide income. Thus it is possible that an amount of income has not been taxed in SA upon distribution to a SA resident beneficiary. The following should be considered:Consideration 1Has the income received by the non resident trust been received as a result of a donation by a SA resident.If the donor is still alive, the amount would have been taxed in the hands of the donor in terms of section 7(8) – donations where a non resident has received income by virtue of the donation.Consideration 2Has the income earned by the non resident trust been taxed in SA either in the hands of the non resident trust or in the hands of the beneficiary?Section 25B(2A) This section states that if a capital distribution is made by a non resident trust to a SA beneficiarythat has not yet been taxed in SA, nor is part of the capital donated to the trustthe donor may have been taxed in terms of 7(8)the trust may have been taxed if income is sourced in SAthe amount will be taxable in SAINTEGRATED ILLUSTRATIONMr A set up an offshore trust. He donated a property in South Africa to the trust and also donated R200,000 that was converted into ?20,000. During the year, the trust earned net rentals of R300,000 in South Africa on the property and earned ?1,000. Mr A’s major son has a vested right to half the trust income. The other half of the trust income is invested in the trust as is to be paid out to all living descendants of Mr A on 1 January 2030. However additional amounts may be paid out at the discretion of the beneficiaries. Assume that the trust is not a SA resident.The average exchange rate for the year was ?1 to R14. What are the taxation implications if:the above facts apply, orin the next year, R10,000 of the interest capitalised was paid out to Mr A’s niece and the above facts applythe above facts apply except that the trust is managed and controlled in South Africathe above facts in part a apply except that the amounts were given to an offshore trust and the donor died 9 months into the year.in the next year, R10,000 of the interest capitalised, and R20,000 of the rent capitalised was paid out to Mr A’s niece, a SA resident, and the above facts in part d applyWould the solution to part e change if Mr A’s niece was a non resident?Ignore capital gains tax.SUGGESTED SOLUTIONPart aThe property rentals are sourced in South Africa and as such would normally be taxed in the hands of the non resident trust or its beneficiaries with vested rights. However section 7 overrides section 25B. Thus all R300,000 net rentals will be taxed in SA in the hands of Mr A.The interest earned is from a source outside South Africa and as such will not be taxed in the non resident trust. Section 7(8) will however apply and the interest of R14,000 (?1,000 x 14) will be taxed in SA in the hands of Mr A.Part bThe question is whether section 25B(2A) would apply to the distribution of capital from an offshore non resident trust.The section would not apply as the capital distributed has already been taxed in South Africa in terms of section 7(8).The capital distribution is not taxed.Part c Section 7(8) would not apply as the donation was to a resident.Half the property rental of R150,000 and half of the interest of R7,000 will vest in Mr A’s major son. The remaining amounts do not vest in anyone. As there is a stipulation in the trust deed, section 7(5) will deem the remaining income to be taxed in the hands of Mr A.Part d25% is earned in the last 3 months and 75% in the first 9 months Thus 75% of the transaction will be subject to section 7(8) and 25% will not be subject to section 7(8) as the donor died.75% of the rentals (R225,000) and 75% of the interest (R10,500) will be taxed in Mr A’s hands in terms of section 7(8).25% of the rentals (R75,000) and 25% of the interest (R3,500) will be taxed subject to rules other than section 7(8). The trust is a non resident. Thus only amounts from a source within SA or deemed to be from a source within SA will be taxable in the Republic. The rentals are from a source within South Africa and will be taxed in the Republic. Mr A’s son has a vested right to half of the rental and will include R37,500 in his gross income. The remaining R37,500 will be taxed in the hands of the trust as it is from a SA source. Section 7(5) will not apply as there is no donation, settlement or other similar disposition for the 25% portion. The interest is not from a SA source and will not be taxed in the Republic.If this interest is later distributed to a SA resident, this amount will be taxed in terms of section 25B(2A) in the hands of the recipient as it has not yet been taxed in SAPart eIf the interest is distributed, 75% of the interest has been subjected to SA tax in terms of section 7(8) in the previous year. 25% of the interest has not been taxed in South Africa. Thus 25% of the interest distribution of R10,000 i.e. R2,500 will be taxed in South Africa in terms of section 25B(2A) being a capital distribution (of a previous income amount) from a non resident that has not been taxed in SA as of yet. The distribution of R20,000 rent will not be subject to section 25B(2A) as all the rent has been subjected to taxation in SA in the previous year. There will be no taxation implications of the rent distribution.Part fNo amounts will be taxed in SA as the distribution is to a non resident and section 25B(2A) does not apply to distributions to non residents. ................
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