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 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
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
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.