LEARNING OUTCOMES AND ASSESSMENT CRITERIA

The content of this learning unit (LU) is based on the following learning outcomes and assessment
criteria of the module:

Learning outcome(s) Assessment criteria

1. Assess the tax profile of a • Determine the various tax liabilities and to provide
taxpayer to determine the various reasons for the inclusion or exclusion of amounts.
taxes payable by a taxpayer. • Assess information needed to determine the
various tax liabilities, including
o the role-players in the tax landscape,
o the types of taxes and their interaction and
o the underlying principles of a tax system.
• Interpret the tax treatment of a transaction with
reference to legislation, double tax agreements
and case law.
2. Advise taxpayers on the tax effect • Evaluate transactions to determine the effect on
of transactions, operations, an individual or corporate taxpayer’s tax liability.
schemes, agreements or events
and calculate the tax
consequences thereof, taking into
account the various taxes
payable.
3. Advise on specific tax and • Interpret a taxpayer’s tax profile to give ethical
financial planning opportunities advice and provide an opinion on tax planning
for individuals as well as for options available within the legal framework of the
business entities. different tax acts, including relevant anti-
avoidance legislation, and applicable case law.
• Reflect on the tax consequences of shifting
income between connected persons by making
use of donations, interest free loans and trusts
(e.g. section 7 and the attribution rules) or entities
(e.g. tax avoidance rules).
• Assess the role of trusts as a planning tool.
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STUDY PROGRAMME AND TIME FRAME

A total of 6 hours of your study time is allocated to LU 19.

Your time should be divided between two aspects:

• Obtaining the required knowledge

This entails working through this LU and the textbooks (SAICA Student Handbook
and SILKE), underlining, making summaries and familiarising yourself with capital
allowances and recoupments.

• Application of knowledge
This entails the completion of the examples and activities included in this LU. After
completion of your studies of LU’s 17 to 21 you will have the opportunity to test your
knowledge by completing some questions which will comprise of integrated activities
covering the five LU’s in Topic 5, but it will also incorporate some of the sections
covered during your studies of Topic 1 to 4. These integrated activities will be
included as additional activities and available under additional resources.

The following time allocation is recommended:

Trusts Minutes
Outcomes and assessment criteria 5
19.1 Background 5
19.2 Beancounter scenario 5
19.3 Content of LU 19 120
19.4 Important law amendments 5
19.5 Additional notes (including Activity 19.1 & 19.2) 210
19.6 Solution of the Beancounter scenario – Discussion Forum 5
19.7 Summary of LU 19 5
Total 360

Note that there is a lot of work to master in the allocated time, however all the sections
covered in this LU, except for the following:
• Paragraph 81 of the Eighth Schedule to the Income Tax Act (Base cost of interest
in discretionary trust – SILKE 24.9.5)
• Paragraph 82 of the Eighth Schedule to the Income Tax Act (Death of beneficiary
of special trust – SILKE 24.3.2)
have been covered in detail in your undergraduate studies. The time in this LU will be
allocated to those sections that were not included in your prior studies and to additional
notes and examples to ensure deeper learning and the development of your decision-
making skills. If the time allocated is not enough, you will have to refresh your memory
regarding sections you already covered in your prior studies in your own time.
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19.1 BACKGROUND
This LU deals with the taxation of trusts. Trusts (excluding special trusts) are taxed at a flat rate of tax
of 45%. Special trusts (defined in section 1 of the Income Tax Act) are taxed at the same progressive
and maximum marginal rates of tax as a natural person. No primary rebate, however, is permissible for
trusts (normal or special trusts). Note that special and foreign trusts are excluded from the ITC 2025 Tax
knowledge list is not part of the PGDA syllabus.

19.1.1 UNGC Principle 10

The UNGC principles were introduced in LU2. Compliance with the laws and regulations is the basis on
which the taxation legislation is founded.

UNGC principle 10 states that businesses should work against corruption in all its forms, including
extortion and bribery. The definition of corruption includes dishonest or fraudulent conduct. Tax evasion
would fall within the ambit of corruption. UNGC principle 10 encourages entities to find a balance
between the social obligation to pay taxes and tax planning, in order to minimise the ‘cost’ of these taxes
for an entity within the ambit of the law. To prevent the transfer of income or assets (from which income
is earned) or growth in the value assets (resulting in higher capital gains) from one person to another
person (who may pay tax at a lower tax rate) to a trust, could be tax evasion or aggressive tax planning.
It is thus important to take note of the UNGC principle 10 when studying this unit. You should be aware
of the anti-avoidance provisions in section 7(2) to section 7(8), paragraphs 68 to 73 of the Eighth
schedule and section 7C, which were introduced to curb tax avoidance.
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Location
of assets


Trust asset
Residency of
trust and
beneficiaries

 
Trust deed
Beneficiaries

Founder/
Income from
donor assets

FACTORS TO BE TAKEN
Trustees INTO ACCOUNT WHEN
DEALING WITH THE
TAXATION OF TRUSTS
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19.2 BEANCOUNTER SCENARIO

Before you start studying the detailed provisions of trusts and its capital tax
implications, read the following scenario relating to the Beancounter family or watch
the video posted on myUnisa. The scenario requires you to read through the
information provided. As you study the different income tax provisions, you should
analyse areas of concern that should be brought to the attention of the Beancounter
family and the impact thereof on their taxes due.

Barry Beancounter's mother, Exotica, passed away on 10 March 2023 at the age of 74 (refer to LU15).
In terms of her last valid will and testament, the Butterbean Testamentary Trust was formed on 1 May
2023.

The trust deed of the Butterbean Trust provides for three trustees namely Barry Beancounter, yourself
(in your capacity as the tax advisor of the family) and a family friend named Re Concile. Exotica
specifically mentioned in her will that Bizzie (Barry’s wife) may not be made a trustee of the trust.

The following relevant items are contained in the trust deed:

• The only beneficiaries of the trust are Soya (Barry's 25-year-old son from his previous marriage,
ordinary resident in Spain since 2019) and Jelly (Barry and Bizzie's ten-year-old daughter).
• Surplus funds in the trust may be invested in fixed deposits, either locally or overseas, in order to
earn interest income.
• The trust income, after an annuity of R10 000 (paid out of dividend income) and R35 000 (paid out
of rental income from the letting of the flats) to Jelly and Soya respectively should be distributed
annually to the beneficiaries of the trust at the discretion of the trustees.

At 29 February 2024, the trust held the following assets:

Market value at Income

time of transfer earned
R
Block of flats - left to the trust by Exotica 5 000 000 Rental income
Listed shares (local) - left to the trust by Exotica 750 000 Local dividends
Cash donated by Barry (see note 1 below) 40 000 Local interest
Residence (see note 2 below) 2 200 000 Rental income

Notes:

1. Barry donated R40 000 to the trust on 5 August 2023. He made this donation out of cash left to
him by his late mother. As you already know, Exotica did not get on with Bizzie and she had a
clause put in her will that the money so inherited by Barry should be excluded from his joint estate
with Bizzie (Exotica mentioned in her will that she could never forgive Bizzie for breaking up Barry's
previous marriage).

2. On 30 September 2023, Barry and Bizzie sold their primary residence to the trust (refer to LU6 par
6.2) for R2.2 million at its market related price. The sale was financed by way of an interest-free
loan account in both Barry and Bizzie's names. Barry and Bizzie are married in community of
property. Barry and Bizzie will still reside in the residence and will pay a monthly rental amount of
R10 800 to the trust. A market-related interest for 5 months on the selling price amounts to R70 536
(R2.2m x 7.75% x 151/365) for the year of assessment. Assume that the official rate of interest is
7.75% and it also represents a market-related interest rate.
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The net income of the trust for the 2024 period of assessment amounted to R378 000 and was
distributed as follows:

Rentals Dividends Interest Rentals Total

(flats) (residence)
R R R R R
Net income 300 000 19 000 5 000 54 000 378 000
Less: Annuities paid
- To Soya (35 000) - - - (35 000)
- To Jelly - (10 000) - - (10 000)
Less: Distributions
made (10 000) (1 000) (5 000) (16 000)
- To Soya (10 000) (4 000) (5 000) (19 000)
- To Jelly
Retained in the trust 245 000 9 000 - 44 000 298 000

Barry has asked you in whose hands the net trust income, amounting to R378 000 will be taxed.

Discussion activity

Before attempting to help Bizzie with her queries, work through and master LU 19. Only
then will you be ready to identify areas of concern and the impact thereof that should
be brought to the attention of the Beancounter family and which you can share on the
Discussion Forum 19.1. The outcomes (solution) for the Beancounter scenario will
be made available during your study week for this LU.

In questions we will provide you with an official rate or repro rate of interest to use in
your solution. If the repro rate is provided you need to add 1% to the repro rate to get
to the official rate. The official interest rate is defined in section 1 of the Income Tax
Act.

19.3 CONTENT OF LEARNING UNIT 19

19.3.1 Study approach

We provide you with a Table of Reference which contains the references to all the sections which must
be studied in this LU together with a reference to the relevant paragraphs in SILKE. The table also
provides a reference to the additional notes provided (if any) in the LU and an indication of whether a
specific section is examinable or not. Unless indicated otherwise, all sections in this LU were covered
in your undergraduate studies. Refer to LU 17, note 17.3.1 for an outline of the study approach to follow
for Topic 5.

We will enhance your understanding of some concepts with activities in the LU. The time provided for
each activity (question or example) is calculated as 6 minutes per page of reading time for each activity,
1.5 minute for every mark and then 6 minutes per page of the solution for you to review your answer
against the solution provided.
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19.3.2 Table of reference

Sections of the Topics SILKE Notes in Exami-

Income Tax Act LU 19 nable

Section 1 Trusts Various 19.5.1 Yes

Definitions
• trust
• person
• connected person
Foreign, special and share incentive
trusts. Note that foreign trusts as a No
concept are excluded.
However it does not exclude section 7(8)
as it affects the distribution of trust income
by a resident trust to a non-resident.
Section 25B Income of trusts and beneficiaries of 24.5 and 24.7- 19.5.2. – Yes
trusts 8 19.5.4.
Section 25B(2A) & 25B(2B) 24.11 No
Section 7 When income is deemed to have 7.5, 7.7, 24.5, 19.5.2 - Yes
accrued or to have been received by the 24.6.1 – 4 and 19.5.4
donor or transferer.
Donations and interest-free loans (not
low-interest loans).
Section 7(8) only to the extent that it 24.6.7
relates to foreign source income.
Sections 7(2)(a), 7(4), 7(6), 7(7), 7(8)(aA) 24.6.5, 24.6.6, No
and 7(11) 24.6.8
Section 7C Loan, advance or credit granted to trust 16.2.6, 19.5.3 Yes
by connected person 24.6.9.1,
(Question will state if shares qualify as 24.6.9.2
preference shares)
7C(5)(a), (b), (c), (f) & (h) No

Section 7D Calculation of amount of interest 16.2.6, 24.6.9.1 Yes

7C(5)(a)
Court cases Interest-free loans: Woulidge (2002 (A)), 24.6.9.1 and LU1 Yes
CIR v Berold 1962 (A) 16.2.6

Eighth Schedule Capital gains and losses

Paragraphs
68(2), 69, 70 and • attribution of capital gains 17.10.4 and 19.5.5. Yes
73 24.9.1, 19.5.6.
paras 68(1), 71 and 72 No

Paragraphs 80 - • trusts and trusts beneficiaries 17.11.2, 24.9.2 19.5.3 - 7. Yes

82 and 24.9.3
(Par 81 and 82 No
were not
covered in
undergrad)

Paragraphs 51 Transfer of residence from company or No

and 51A trust
Comprehensive example in SILKE 24.10 Yes
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Note: Broad area exclusions – specialised in nature

Remember that any reference or provision to a broad area exclusion as listed in the ITC
2025 Tax knowledge list is not part of the syllabus.

19.3.3 Paragraphs in SILKE which you may ignore

The following paragraphs in SILKE may be ignored as these paragraphs are excluded from the ITC
Tax knowledge list:

SILKE reference Topic

24.3.2 Special trusts (s 1 and par 82 of the Eighth Schedule)
24.6.5 Amount vested that could have been revoked (s 7(6))
24.6.6 Donation of the right to income (s 7(7))
24.6.8 Recovery of tax (s 91(4) and first proviso to s 90)
24.11 Non-resident trusts (s 25B(2A) and par 80)

19.4 IMPORTANT LAW AMENDMENTS

Before continuing with LU 19, take note of the following amendment to the Income Tax Act, which is
contained in the Taxation Laws Amendment Act 17 of 2023. Certain amendments that were enacted in
the prior year’s Taxation Laws Amendment Act 20 of 2022 are also summarised for your reference.

Relevant amendments contained in the Taxation Laws Amendment Act 17 of 2023

are as follows:

• Section 7C(3A) was inserted into the Act and states that if the amount of a donation
in terms of subsection 3 is denominated in any currency other than that of the Republic
the amount should be translated at the average rate for the year of assessment in
respect of which the amount is treated as a donation.

• Section 7C(5)(d) exempts a loan, advance or credit to a trust to fund the acquisition
of an asset from the application of sections 7C(2) and (3), if the natural person (or the
spouse of that natural person) who provided the loan, advance or credit to a trust or
at whose instance the company provided the loan, advance or credit to the trust, used
the asset as a primary residence throughout the period during the year of assessment
during which that trust or company held that asset.

• Section 7C(5)(d)(i) was amended to make it clear that the primary residence and the
land on which it is situated (including unconsolidated adjacent land) should not exceed
two hectares and should be used mainly for domestic or private purposes.

• Section 7C(5)(ii) was amended and now includes funds used for both the acquisition
and the improvement of the primary residence.

The amendments are effective from 01 January 2024 and applies in respect of years of
assessment commencing on or after that date.
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Relevant amendments contained in the Taxation Laws Amendment Act 17 of 2023

are as follows:

• Section 25B(1) was amended to specify that, subject to section 7, an amount that
has been derived for the immediate or future benefit of a resident beneficiary with a
vested right to that amount, is deemed to be an amount that has accrued to the
resident beneficiary.
• Section 25B(2) was also amended in line with section 25B(1) to state that a resident
beneficiary who has acquired a vested right to an amount in consequence of the
exercise by the trustee of their discretion, is deemed to be an amount that has
accrued to the resident beneficiary.

The amendments to section 25B(1) and (2) effectively means that where the beneficiary
who has a vested right to an amount, in terms of section 25B(1) or (2), is a non-resident
and the provisions of section 7 do not apply, than the trust is taxed on that amount vested
in a non-resident beneficiary. This amendment is effective from 01 March 2024 and
applies in respect of years of assessment commencing on or after that date. Not part of
Tax Examinable pronouncements for 2024

The following law amendments were promulgated in the Taxation Laws

Amendment Act No. 20 of 2022:

Section 7C(3) Section 7C(3) now not only refer to ‘trusts’ but also ‘companies’.

19.5 ADDITIONAL NOTES

19.5.1 The taxation of trusts

The definition of a person in section 1 of the Income Tax Act includes a trust. This means that a trust is
a taxpayer in its own right and that the process of calculating its taxable income will be the same as for
any other taxpayer. A trust can qualify for all the applicable deductions or allowances provided for in the
Income Tax Act.

Section 1 further defines a trust and a special trust. A trust means any trust fund, administered and
controlled by a person appointed under a deed of trust or will. A trust is liable for normal tax at a flat rate
of 45% and the inclusion rate for CGT for trusts is 80%.

Note: A ‘special trust’ (paragraph (a)) means a trust created solely for a person with a
disability as defined in section 6B(1) of the Act, or a testamentary trust for relatives where
the youngest of the beneficiaries are under the age of 18 (paragraph (b)).
A special trust is excluded from the ITC Taxation Knowledge list.

Taxation reasons for the formation of trusts

If a person owns growth-oriented assets, all growth in the value of the assets held will be reflected in
the value attributed to property (actual or deemed) at the time of death of a person and will consequently
be subject to estate duty (Refer LU15). To avoid paying estate duty on the future growth of the value of
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assets, estate planning is used to "freeze" the value of "growth" assets at present values. This can be
done in a number of ways:

(a) selling or donating the assets concerned to a trust

(b) selling or donating the assets to a company
(c) selling or donating the assets directly to an intended beneficiary
(d) donating the assets to a spouse.

In disposing of his "growth" assets, the planner must ensure that, for estate duty purposes, any assets
donated prior to his death, will not be reflected in his estate at the time of his death (for example, there
must be no revocation clause in the deed of donation). This provides a taxpayer the opportunity to
protect the capital growth of the asset from the time of the donation to the time of his death from estate
duty.

Trusts are used primarily for estate planning, (as opposed to saving income tax). Trusts can also be
used for other purposes such as trading (business) in the same way as a company does. Trading trusts,
however, are seldom used because they have several disadvantages, the most important being the
unfavourable rate of tax to which they are subject – a 45% flat rate as opposed to a 27% flat rate (from
years of assessment ending after 31 March 2023) in the case of a company.

Basic tax principles of a trust

General

A trust comes into being through a trust deed. The way in which it is established (inter vivos or mortis
causa (testamentary trust)) determines if a trust will be classified as an inter vivos trust or testamentary
trust. A literal translation of the Latin term “inter vivos” is “while you are living”. A trust created in terms
of a deceased’s last will and testament is known as a “testamentary trust”. No estate duty or CGT is
saved on the creation (at the time of death) of such a trust, but as in the case of an inter vivos trust,
future generations will benefit if the trust is not liquidated or dissolved after the death of the donor.

For the purposes of this LU, we will focus on the donation or sale of growth-oriented assets (including
income-producing assets) to a trust, as well as the transfer of assets to a trust by a deceased estate.

Should a taxpayer (inter vivos) decide to donate an asset to a trust, the taxpayer would be liable for
donations tax at 20% (or 25% of the aggregate of donations that is above R30 million on the market
value of the asset). However, there will be no donations tax consequences if the taxpayer decides to
sell the asset at its market value to the trust. In most cases, an interest-free loan is recorded in the
books of the trust to represent the purchase price of the asset purchased by the trust. You need to
remember that section 7C may apply on the interest-free loan (refer to LU2).

If the asset has been sold instead of donated to the trust and the purchase price has not been settled,
but an interest-free loan had been created instead, there would be estate duty payable on the
outstanding loan on his death. The outstanding loan would be included in the value of his estate for
estate duty purposes because the loan represents an asset in his estate.

Note at this stage, that as a rule, an inter vivos trust does not minimise normal income tax. There are
specific anti-tax avoidance measures in place (contained mainly in section 7 of the Income Tax Act and
in the attribution rules of the Eighth Schedule to the Income Tax Act) to prevent the avoidance of normal
tax.
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Parties to a trust
Founder
The founder is the original owner of the property that will be placed in the newly formed
trust. The founder will appoint the trustees and identify the income and capital bene-
ficiaries as well as their rights to the income and/or capital of the trust. Remember that
the founder should not retain any controlling power over the trustees as section 3(3)(d)
of the Estate Duty Act can be applied (refer to LU15).
Trustees
A trustee can be an individual or a company. Trustees are the “management” of the
trust. The assets vest in the trustees but not for their own benefit. The trustees act in
a fiduciary capacity and are accountable for the assets held in the trust.

Beneficiaries


Beneficiaries have rights. They have either vested or contingent rights to income and
they have either vested or contingent rights to the capital of the trusts. The rights of
the beneficiaries are described in the trust deed.

Rights of the beneficiaries

The relationship between the power of the trustees (discretionary or not) and the rights of the benefi-
ciaries (contingent or vested) is very important to determine who will be taxed on the trust income.

A beneficiary may only have a vested right to the income or portion of the income of a trust alternatively
he/she may only have a vested right to the capital of a trust. Of course, he or she may also have a
vested right to both the capital and the income of a trust. Whether or not a person has a vested right to
the income and/or the capital of a trust, will determine if the income and/or capital gains of the trust will
be taxable in:

✓ the hands of the donor; or

✓ beneficiary; or
✓ the trust itself.

So what exactly does the word “vesting” mean?

The easiest way to understand this concept is to ask the question: “Would the income of the trust form
part of my estate should I die today?” If the answer is “yes”, then the income vests in the beneficiary. It
does not matter that the income is not actually paid out to a beneficiary – it could be accumulated in the
trust on behalf of or in favour of the beneficiary. If there is or has been a vesting, the accumulated income
belongs to the beneficiary.

If the trust deed makes provision for the trustees to decide how the income and capital will be
distributed, the trust is regarded as a discretionary trust – that is, there is no vesting until the trustees
exercise their discretion. If the trust deed stipulates exactly how the income and capital of the trust are
to be dealt with, it is a non-discretionary trust (or a so-called ‘bewind’ trust) and the income and capital
vest in the hands of the beneficiary.
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19.5.2 The flow of income and capital in a trust (diagram format)

TRUST
Founder, Assets
donor or sold or donated or Income-producing assets transferred
deceased bequeathed from the founder/donor/deceased
estate estate to
trustees of the trust

Income
Conduit-pipe principle

Income Capital

Income Capital
beneficiaries: beneficiaries:
Taxed in terms of Eighth Schedule
ss 25B or 7 par 80
Refer to 19.6.4 Refer to 19.6.5

19.5.3 Tax implications of donations and anti-avoidance measures

Capital (wealth) transfer and related taxes

Donation means any gratuitous disposition of an asset (the asset itself or a right in an asset or the rights
to the fruit of the asset). The property is transferred from one person to another. A tax on the market
value of the capital transfer will be triggered. These taxes are donations tax and in the case of death of
the taxpayer - estate duty. These assets will also be subject to normal tax.

REMEMBER:
• When the transfer of an asset takes place, determine whether donations tax (or in the case
of death – estate duty) may apply and ALSO whether any normal tax rules apply.
• The normal tax rules may be recoupments of trading stock at market value (section 22(8)),
the recoupments of allowances previously allowed as deductions on depreciable assets
(section 8(4)(k)) and, in the case of an asset not kept as trading stock, a possible capital gain
or capital loss.
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Low-interest rate loans and section 7C

When an asset is sold at market value the disposal of the asset is not a donation and donations tax is not
payable. If the seller finances the acquisition of the asset by giving a loan and does not charge any interest
or charges interest at a rate that is below the market-related rate, there is an element of gratuitousness.
The fact that the seller did not charge a market-related interest rate is regarded as a gratuitous disposition
and section 7 of the Income Tax Act and the attribution rules of the Eighth Schedule may apply. The seller
will be taxed in terms of the conduit pipe principle but limited to the forgone interest (calculated as the
difference between the market-related interest on the loan and the actual interest paid) and not on the
actual income from the asset. The Woulidge court case established that the amount of interest must be
determined without taking the in duplum rule (refer to section 7D) into account, thus the income in terms
of section 7 attributable to the donor will not be limited to the capital balance of the loan account.

Example: Mr X, a resident, sold a block of flats at the market value of R3 000 000 to a resident trust on
an interest-free loan. No amounts have been repaid. His minor daughter is the only beneficiary with vested
rights to both the income and the asset. The current market-related interest rate is 10%. The maximum
rental income that can be attributable to Mr X in terms of section 7(3) is R300 000 (R3 000 000 x 10%). If
the taxable rental income is R400 000 then Mr X will pay tax on R300 000 and his daughter on R100 000
as the rental income is limited to the notional (forgone) interest. If the taxable rental income is only
R200 000 then Mr X will only be taxed on R200 000 – refer to the Woulidge court case.

In terms of section 7C a deemed donation amount will be calculated as the difference between the
interest payable on the loan and the interest calculated at the official rate of interest, on the last day of
the year of assessment of the trust. This deemed amount will be deemed to be a donation in the hands
of the lender (to the trust) and donations tax will be calculated. Section 7C will not be applied
retrospectively. Please refer to SILKE 24.6.9.2 and 26.11 as well as sections 7C and 7D in the Income
Tax legislation.

Anti-avoidance measures on the income from the donated asset

Apart from the above taxes that might arise when an asset is transferred from one person to another,
the Income Tax Act also makes further provision to penalise the shifting of income (income-splitting)
from one taxpayer to another. Section 7(2) to 7(8) deems income to be taxed in the donor’s hands.

Section 7(2), 7(3), 7(5) and 7(8) deals with the income from the asset “donated” and not with the
realisation of the asset itself. If a flat had been donated, then the rentals would be subject to section 7.
If the donated flat is subsequently disposed of, the attribution rules in the Eighth Schedule will apply, if
the asset was held as an investment. The goal of these anti-avoidance provisions is to penalise “non-
bona fide” donations.

Section 7(3) applies to income on an asset donated by a parent to his/her minor child (younger than 18
years). The child does not have contractual legal capacity until the child becomes a major. The parent
as custodian has to assist the child when legal matters are at stake. For all practical purposes the parent
is still in control of the asset.

Another example will be when a donation is made subject to a condition (section 7(5)). Until the condition
is met the beneficiary only has a spes (hope) to receive a benefit, thus it makes sense that the income
on such an asset has to be attributable to someone (the donor), as the donor did not make a bona fide
donation.

Although a donation to a non-resident might be a bona fide donation, section 7(8) penalises the donor
on the income from the asset. Residents are taxed on their worldwide income and non-residents are
only taxed on income from a source from the Republic in terms of section 9 and common law principles
(see LU5). Section 7(8) can be seen as an anti-avoidance provision to protect the South African tax
base.
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When there is an international transaction between a resident and non-resident that is connected
persons, this ‘affected transaction’ as defined in terms of section 31, could cause either a dividend in
specie or a donation to apply (refer to 21.8 in SILKE) and a deemed interest to apply. If section 31 is
applied, sections 7C, 7(8) and paragraph 72 of the Eighth Schedule do not apply. The opposite is also
applicable. Thus if section 31 is not applied, section 7(8) and/or section 7C could apply. Please refer to
LU10 for a full explanation of section 31.

Deductions

For income tax purposes donations are usually not deductible in terms of sections 11(a) and 23(g) of
the Income Tax Act, as these sections require the taxpayer to prove that the donation was made in the
production of income and that it is not of a capital nature. It means that the benefit from the donation
relates to the operations of the business and not to the structure and that an enduring benefit was not
obtained. Section 18A allows a deduction to certain organisations, but the deduction is limited to 10%
of taxable income before this deduction.

The person receiving the donation will have to account for the asset, and depending on the nature of
the asset, it will be treated either as trading stock or as an investment. If treated as trading stock, the
market value will be deductible under section 22(2) (part of opening stock) and if not, the market value
will be used as the base cost of the asset, if the asset was acquired after 1/10/2001. The asset is moving
OUT of the donor’s tax-net INTO the tax net of the person (receiving the asset).

REMEMBER:
• A donation of property triggers donations tax.
• When a person dies, it implies that someone else will enjoy the assets and that the
property will be transferred to another person, it is thus NOT a ‘donation of property’.
This event triggers estate duty (refer to LU15). Both taxes are tax on the transfer of
property (wealth taxes).
• Death (section 9HA) and donation (section 56) are both events for CGT-purposes.
• Section 7(2) to 7(8) (anti-avoidance provisions) apply to all donations and not only to
donations to trusts.
• The attribution rules in terms of the Eighth Schedule apply to all donations and not only
to donations to trusts.

19.5.4 Income from trust assets

This part deals with the taxation of income (excluding capital gains and losses). The “conduit pipe”
principle applies to trust income. According to this principle, income of a trust does not lose its identity
if it vests in a beneficiary during the same year of assessment.
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Section 25B in diagram format

The following diagram illustrates the “person” to whom the receipt/ accrual may be allocated:

Was any amount received by or did it accrue in favour of a trust?

YES

Is section 7(2) – 7(8) applicable?

YES NO
Was the amount derived for the immediate or
Tax the donor future benefit of an ascertained beneficiary
with a vested right to that income?

YES
(s 25B(1)) NO

The amount is then Did the beneficiary acquire a

deemed to have vested right to any amount of
accrued to the as- YES (s income in consequence of the
certained beneficiary. 25B(2)) exercise by the trustees of their
Tax the beneficiary discretion?
NO

The amount is then deemed to have accrued

to the trust.
Tax the trust

Section 25B

Trusts are taxed in accordance with the general provisions of the Income Tax Act read together with
section 25B and paragraph 80 of the Eighth Schedule. However, before income (excluding capital gains
and capital losses) can be taxed in the hands of the trust, the provisions of the Income Tax Act state
that this income must be taxed in the hands of the donor in the first instance in terms of section 7.
Section 25B is thus subject to the provisions of section 7. If that is not possible (because the donor
died or the provisions of section 7 do not apply for one reason or another), then section 25B attempts
to tax the beneficiary.

If there is a vested right to the income by the beneficiary (even if it is retained and accumulated in the
trust for the benefit of the beneficiary) or the trustees exercise their discretion in favour of the beneficiary
and determine that the beneficiary has a vested right to the income in the trust, it will be taxed in the
hands of the beneficiary (section 25B(1) or (2)). Only as a last resort, if neither the donor, in the first
instance, nor the beneficiary, in the second, can be taxed, the trust will be taxed (the beneficiary has no
vested right to the income of the trust).
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Section 25B provides for the normal permissible deductions and allowances in determining the taxable
income of the beneficiary and/or the trust. These permissible deductions and allowances flow through
to the beneficiary but he or she may not utilise any loss so created (section 25B(4)). A loss so created
remains in the trust and is used to reduce the taxable income of the trust for that year (if any) (section
25B(5)). Any excess is carried forward to the following year to be offset against any income distributed
to or vested in the beneficiary during the following year, or if there is no income to be distributed to the
beneficiary and also no vesting, to be utilised against the taxable income remaining in the trust (section
25B(6)).

However, if section 7 is applicable – that is, if the donor would have been taxed on the income of the
trust had there been income – the loss (allowable deductions and allowances exceed income) of the
trust so arising would flow to the donor. There is an exception to this principle, namely section 7(8)(b),
which deals with a donation by a South African resident to a non-resident. The South African resident
donor may not utilise this loss arising.

REMEMBER:
If any income is taxed in the hands of the trust (because section 7 cannot be applied or there
has been no vesting in the hands of the beneficiary) and capitalised in the trust, any
subsequent distribution of that income to the beneficiary in later years, will be capital in nature
and it will not be subject to further income tax or CGT in the hands of the beneficiary.

Section 7

As mentioned above, the provisions of section 7 must first be applied, sub-sections 7(2), 7(3), 7(5) and
7(8) before section 25B can apply. All these sub-sections refer to a “donation, settlement, or other
disposition”. Thus, before the provisions of these sub-sections can be applied, there must be a
“donation, settlement or other disposition”. What exactly do the words, “donation, settlement or other
disposition” mean for the purposes of section 7?

Obviously, the ordinary meaning of a donation would fall within the ambit of a donation. The release,
waiver or renunciation of a debt also fits the definition. The courts have determined that an interest-free
loan to a trust (or any other person) is regarded as a “continuing donation” and falls within the ambit of
the words “donation, settlement or other disposition” for the purposes of the relevant section 7
provisions. The sale itself, on the other hand, can never be regarded as a donation if it takes place at
market value. Bear in mind that an interest-free loan is deemed to be a continuing donation for donations
tax purposes imposed in terms of section 54 of the Income Tax Act.

A brief summary of the applicable sub-sections follows in the table below:

SILKE Legislation Brief summary

24.5 Section 7(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. If so,
section 7(1) takes precedence over section 7(5). Section 7(1) does not
override section 7(3).
7.5 Section 7(2) If a spouse receives income from his or her spouse exceeding
24.6.2 (exclude ‘reasonable income’ from either a trade, partnership or private
s 7(2)(a)) company.

7.7, Section 7(3) Donation, etc. by a parent to a minor child or minor stepchild. Income
24.6.3 must have been received by, accumulated, or expended for the
maintenance/ education/benefit of the child. The income will be
deemed to be that of the parent.
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SILKE Legislation Brief summary

24.6.4 Section 7(5) Any donation, which is subject to a stipulation or condition in the trust
deed that income will not be distributed until the happening of some
event. This section will apply only to income not accrued to or received
by the beneficiary. The retained income will be deemed to be the
income of the donor.

24.6.7 Section 7(8) An amount received by, or accrued to, a non-resident by reason of a
donation made by a resident, must be included in the income of the
resident.

The meaning of “income”, “minor child”, “by a parent” and section 7(3) (SILKE 7.7)

The above sections also refer to the word “income”. The word “income” as used in section 7(2) to 7(7)
has been interpreted by the courts not to mean “income” as defined in section 1 of the Income Tax Act
(gross income less exempt income), but profits, or something that equates to taxable income.

REMEMBER:
Sections 7(3) refer to a minor child or minor stepchild (or adopted child). A minor child or
stepchild means any child under the age of 18, who is unmarried. Thus, if a 16-year-old
person gets married and then divorces at the age of 17, he or she is never again regarded
as a minor. It is clear that section 7(3) does not apply after the death of a parent (because
the parent is no longer a taxpayer); nor does it apply when a child reaches the age of 18 or
gets married, whichever happens first.

It is important to ascertain whether the parents are married in or out of community of property. If the
parents are married in community of property, the deemed income arising in their hands “by reason
of” the donation, must be divided equally between the two parents and be included in their respective
incomes, if all the other requirements of section 7(3) are met. If the parents are married out of community
of property, then the income arising “by reason of” the donation will be deemed to be received solely by
the parent making the donation. Bear in mind that an interest-free loan is regarded as a “continuing
donation” for the purposes of section 7.

An important aspect of the application of section 7(3) is the meaning attributable to the income arising
“by reason of”. In effect it means “as a direct result of”. For example, a father lends R100 000 interest-
free to his minor child (or a trust where his minor child is a beneficiary). The money is invested as follows:
R50 000 in local interest-bearing debentures and R50 000 in local shares that earn dividends. It is clear
that any income arising is “by reason of” the donation and will thus be deemed to be the income of the
father in terms of section 7(3). Following the “conduit pipe” principle, the local dividends are deemed to
be included in his income but will be exempt in terms of section 10(1)(k)(i). The same principle will apply
to the local interest – it will be included in his gross income. He is, however, entitled to the section
10(1)(i) exemption.

A further problem in relation to “by reason of” arises when the interest-free money lent is used to produce
income, where the minor child uses his or her skill and labour to produce the income. For example, the
minor child starts a business with the money. It may be argued that there are two reasons for the receipt
of the income, namely the interest-free money lent to the minor child and the child’s own skill, wits and
labour. The better view is to apportion the income between the father and the child, but not necessarily
50% each. Remember, the onus is on the taxpayer to suggest some reasonable basis for apportionment.

Note that the parent may not be taxed on deemed income which exceeds the reasonable market-related
interest which he/she could have received had he/she invested that amount. Refer to CIR v Woulidge
in LU1 in this regard.
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19.5.5 Capital gains or losses owing to the disposal of trust assets

Remember that the trust assets vest in the trustees and that the beneficiaries may have a vested interest
in the trust assets or in the capital proceeds or gains from the disposal of the trust assets. The
beneficiaries may have obtained this interest from the inception of the trust or because of the exercise
of the trustees’ discretion. If there is a disposal of a trust asset by the trustees, the following question
arises,
Who will be taxed on the capital gains and who will receive the benefit of a capital loss?

The answer is in paragraph 80 of the Eighth Schedule. Paragraph 80 is subject to the attribution rules
contained in paragraphs 68 to73 on the same basic principle that applies to section 25B where section
25B is subject to the provisions of section 7.

Anti-avoidance measures on capital gains made from the realisation of a “donated” asset

The attribution rules are extensions of the rules contained in section 7. The wording of the relevant
attribution provisions is virtually the same as in section 7 except that it covers the accrual of capital
profits rather than the accrual of income on donated assets.

Example: A resident donates an asset to a non-resident and the non-resident realises the asset. The
income arising before the sale of the asset would be taxable in the resident donor’s hands in terms of
section 7(8). In addition, the capital gain made by the non-resident upon the sale of the asset will be
attributed to the resident donor and thus deemed to be a capital gain in his or her hands in terms of
paragraph 72 of the Eighth Schedule (CGT for non-resident excluded).

Bear in mind that only capital gains are attributed to the donor and the benefit of a capital loss is lost.

REMEMBER:
The attribution rules as well as section 7 apply to all donations and not only donations to
a trust.

19.5.5.1 Summary of the attribution rules for CGT purposes (SILKE 17.10.4 and 24.9.1)
A summary of the attribution rules as set out in the Eighth Schedule and their application for trusts
follows:

Income Tax Act – Eighth Application

Schedule
Par 69: attribution of • The parent is taxed only on the capital gain.
capital gain to parent of a • The capital loss is trapped in the trust.
minor child – • No reference is made to the residence of the parent or the minor child
similar to section 7(3) and normal rules regarding residents and non-residents apply (refer
LU5).
Par 70: attribution of • Only applies to a resident donor when the capital gain did not vest in a
capital gain subject to resident beneficiary  then the resident donor is taxed.
conditional vesting – • The capital loss is trapped in the trust.
similar to section 7(5)
Par 73: attribution of Where both an amount of income and a capital gain are derived by reason
income and capital gain of or attributable to a donation, settlement or other disposition, THEN
the total amount of that income and capital gain must not exceed the benefit
derived from the donation, settlement or other disposition (including the
benefit in the form of interest – Woulidge principle of limitation of the
amount).
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Activity 19.1 (35 minutes)

Example 19.1

Attribution of income and capital gain

(Read SILKE Example 17.56 as well)

Jo Slo (a resident) sold a holiday beach cottage in Cape Town at market value of R500 000 (inclusive
of transfer duty) on interest-free loan during the 2022 year of assessment to a resident trust. Had the
trust borrowed the money to purchase the property, it would have paid interest at the annual rate of 10%
(a reasonable market-related interest rate). You may assume that the official interest rate is 7.75% for
the 2024 year of assessment.

His minor son (also a resident) is currently the only beneficiary of the trust. The trust will dissolve when
his son attains the age of 30 years. If the son dies before 30, UNISA, a registered public benefit
organisation (PBO) will be the beneficiary of all retained income and assets on the date on which his
son would have attained the age of 30. The trustees have the discretion to distribute income on a yearly
basis for the benefit of his son’s education.

During the 2024 year of assessment, a holidaymaker made an offer to buy the beach cottage for
R2 000 000. The trustees accepted the offer and the title deed was registered on 28 February 2024 in
the name of the new owner. The proceeds were used to repay the loan owed to Jo Slo on the same
date and the balance will be invested on the money market until the trust dissolves.

The following information relates to the trust:

Net rental Distributed Reason- Subject Subje Sub- Taxed in

income to son able to s 7(3) ct to s ject to trust
interest at 7(5) s 7(1) s 25B
10%
R R R R R R R
2022 Note 1 40 000 20 000 50 000 20 000 20 000 - -
2023 Note 2 55 000 25 000 50 000 25 000 25 000 - 5 000
2024 Note 3 70 000 30 000 50 000 30 000 20 000 - 20 000
Total 165 000 75 000 150 000 75 000 65 000 - 25 000
Eighth Capital Distributed Reason- Subject Subje Taxed in
Schedule gain to son able to ct to trust
Note 3 interest par 69 par 73 par 80
2024 1 500 000 - As above nil 10 000 Nil 1 490 000

Remember the following:

• The asset had been sold at market value – no donations tax implications for Jo Slo. The only benefit
that Jo had conferred on the trust is the interest benefit.
• The interest-free loan is a disposition and the deeming provisions in section 7 and the attribution
rules in the Eighth Schedule may apply to Jo Slo, BUT only to the gratuitous element of the interest-
free loan. In total up to 2024, the trust would have paid R150 000 cumulative interest (reasonable
interest in terms of the Woulidge principle) in total. He cannot be taxed on more than R150 000.
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• Although the minor child is the only beneficiary of the trust at this stage, he does not have a vested
right to any income or capital or asset before he attains the age of 30. If he dies before 30 then
everything will be disposed of to UNISA (PBO).
• All parties are residents and the rules applicable to non-residents do not have to be taken into
account.
• If Jo Slo had donated the asset, then the capital gain on the asset would have been attributed to Jo
Slo in terms of par 69. This is not the case and par 69 cannot be applied.
• The fact that the capital gain did not vest in a beneficiary means that the trust has to include the
capital gain at an inclusion rate of 80%. If the capital gain had vested in a natural person or was
attributed to a natural person, the inclusion rate would have been 40%.

Notes:

(1) 2022 year of assessment: Net rentals of R40 000 were earned. Section 7 is applicable because
a gratuitous disposition was made up to R50 000 (reasonable interest that Jo could earn). The
total R40 000 can be taxed as it was attributed to the “donation”. The minor child received a
benefit of R20 000, thus section 7(3) is applicable to the amount distributed. Section 7(5) applies
to the retained income of R20 000 as there is a contingent future beneficiary. Jo Slo has to
include R40 000 in his taxable income for the 2022 year of assessment.

(2) 2023 year of assessment: Net rentals of R55 000 were earned. The maximum that the donor
can be taxed on is the R50 000 (limited to the reasonable interest on grounds of the principles
entailed in the Woulidge court case). The R5 000 cannot be taxed in the beneficiary’s hands, as
it is uncertain if he will ever receive the benefit. The trust itself will thus be taxed on R5 000.

(3) 2024 year of assessment: A capital gain of R1 500 000 was made. According to par 73 of the
Eighth Schedule, the donor cannot be taxed on more than the cumulated benefit that he derived
from his donation to the trust. Jo Slo’s accumulated benefit was in total R150 000 (over the
3 years). He was already taxed on R140 000 (R40 000 + R50 000 + R50 000, years 2022 – 2024
meaning that only R10 000 of the capital gain can be attributed to him. The gain does not vest
in any beneficiary and therefore the trust will be accountable to include R1 490 000 (R1 500 000
– R10 000) as a capital gain. The gain must be multiplied by the 80% inclusion rate giving a
taxable gain of R1 192 000.

The normal tax liability of the trust is calculated as follows for the 2024 year of assessment:
R
Net rentals (R70 000 – R50 000) 20 000
Taxable capital gain 1 192 000
Taxable income 1 212 000
Normal tax liability at 45% 545 400

Application of section 7C

Joe is deemed to have made a donation to the trust on 28 February 2023 (interest-free loan) The
donation is calculated at the official rate of interest on the last day of the year of assessment as:

• R500 000 (the initial interest-free loan provided to the trust)

• x (7.75% - 0) (official rate of interest) x 365/365 days
• = R38 750 (deemed donation).

Joe will be able to use his annual donation tax exemption of R100 000 against this deemed amount if
he had no other donations during the year of assessment.
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19.5.5.2 Summary of paragraph 80 (SILKE 24.9)

Income Tax Act – Application

Eighth Schedule
Par 80: capital gain This paragraph is subject to the normal attribution rules.
attributed to bene- • Par 80(1) deals with an asset distributed to a resident beneficiary.
ficiary
Where a capital gain is determined in respect of the vesting of a trust asset in
a resident beneficiary, the resident beneficiary will be taxed on that capital gain
(not if it is a capital loss). It can only happen when a disposal takes place. A
disposal can only take place if an interest in the asset is vested in a beneficiary
meaning that a contingent right changes to a vested right (par 11(1)(d)). Refer
to par 13(1)(a)(iiA) as well. When the asset is not vested in any beneficiary, the
trust will be taxed on the capital gain.
• Par 80(2) deals with vested interests in the capital gain (not the asset).
If the capital gain is vested in a second trust, the first trust will disregard the
gain in terms of par 80(2).

19.5.6 Distribution of a trust asset

Paragraph 80 sets out the rules that apply to a trust where a capital gain is attributed to a beneficiary.
The disposal of an asset triggers the application of the Eighth Schedule. An asset is defined in para-
graph 1 and includes a right or interest in property. When a right or interest in a property is obtained or
given, the rules of CGT are triggered, but when the actual delivery of the asset takes place, it cannot
trigger CGT again.

Paragraph 11(1)(d) of the Eighth Schedule treats the vesting of an interest in an asset of a trust in a
beneficiary as a disposal.

REMEMBER:
Par 13(1)(a)(iiA) - The time of the disposal of an interest in an asset of a trust to a beneficiary
is when the beneficiary has a vested interest in the asset, the date on which the interest
vests.

If a beneficiary has a vested interest in an asset from the inception of the trust, the disposal of that asset
to the beneficiary cannot trigger CGT in the hands of the trust. The trustees are only dealing with that
asset on behalf of the beneficiary. The trustees cannot vest an interest in an asset in a beneficiary who
already has a vested right. The trustees can therefore only vest an interest in an asset in a beneficiary
who does not have a vested right prior to the decision of the trustees or the occurrence of an
event. Contingent rights to trust assets can become vested and at that stage, a disposal occurs that is
subject to CGT.

19.5.7 Other relevant aspects regarding base cost of assets including rights (SILKE
24.9.5)

Income Tax Act Application

Base cost of inte- Paragraph 81 treats the base cost of a person’s interest in a discretionary trust to
rest in a discre- be Rnil. This is logical because the beneficiary only has a hope (spes) of getting
tionary trust for something in the future. It is a contingent right with no value until the occurrence
beneficiary of the event.
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Income Tax Act Application

Base cost of an In the case of a testamentary trust, the base cost of the asset (for the trust) will be
asset for a testa- an amount of expenditure incurred equal to the market value, as contemplated in
mentary trust paragraph 31 of the Eighth Schedule, of that asset at the date of the deceased
person’s death plus any further costs incurred by the deceased estate (see
section 9HA(3)) read with section 25.
Base cost of inte- The beneficiary has a right to claim the asset or capital gain from the trustees.
rest in a non-dis- That right has a value.
cretionary trust For example:
for beneficiaries The Armstrong Trust is a testamentary trust formed for the benefit of Jane. She is
the only beneficiary of the trust. She has had a vested interest from the inception
of the trust. On 15 March 2018, a block of flats was transferred to the trust. The
market value of the block of flats on that date was R3 million. Jane’s right to the
property on the date she acquired the right is R3 million. Depending on the trust
deed she may or may not sell her right in the trust. The value of the right (base
cost) for CGT purposes is R3 million.
If the asset is distributed to her when the value of the block of flats is R5 million,
then no CGT consequences will arise for Jane. It will only arise when she disposes
of the block of flats at a later stage.
In the case of an inter vivos trust, the base cost of an asset will be the same as for
Base cost of an
any other taxpayer. However, if the asset was disposed of to the trust
asset for an inter
vivos trust
• by means of a donation, or
• for a consideration not measurable in money, or
• to a person who is a connected person for a consideration which does not
reflect an arm’s length price,

the trust is treated as having acquired the asset at a cost equal to the market value
at the time of the disposal by the donor. See paragraph 38 – rules applicable to
connected persons.

Activity 19.2 (92 minutes)

Example 19.2

CGT; taxable income and tax liability for trusts and its beneficiaries; estate planning

Complete the activities below. Use these activities to assess your own knowledge, competencies and
take responsibility for your own learning experience. The activities will assist you to identify shortcomings
in your knowledge relating to LU 19 and will also serve as a measure of your understanding and ability
to apply your tax knowledge obtained in practical situations.
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You are employed by Expert Trust Advice (a legal firm) as the tax consultant. All tax-related matters
are referred to you. You have to sort out the following three queries as a matter of urgency.

Remember that all the taxpayers involved are residents, as defined, except where stated to
the contrary.

Query 1 7 marks

The Butternut Trust is a testamentary trust that was formed on 1 December 2018 for the benefit of the
late Butter Nut’s children. All the assets in the trust were transferred by the executor of the estate of
Butter Nut to the trustees of the Butternut Testamentary Trust.

The beneficiaries of the trust are Soup and Beetroot. Soup is a full-time student, a South African
resident and 19 years old on the last day of February 2024. Beetroot is not a resident, as defined, and
25 years old on the last day of February 2024.

The trust deed stipulates that both children have an equal vested right to the income of the trust, but
not the capital or capital gains of the trust. The trustees are allowed to sell the assets and to distribute
the capital gains as they deem fit to either one of the beneficiaries or both of them.

During the year of assessment ending 28 February 2024 the trustees sold South African listed shares
for R300 000. The trust is not a share dealer. The base cost of the shares was R170 000, and the
trustees’ remuneration amounted to R6 000 in respect of the sale of the listed shares. The capital gain
was distributed at the discretion of the trustees in equal shares to Soup and Beetroot.

REQUIRED: Marks
Determine the taxable capital gain to be included in the taxable income of Soup,
Beetroot and the trust for the 2024 year of assessment. Assume that there were no
other capital gains or capital losses for the parties involved, nor any assessed capital
7
losses brought forward from the previous year.

Query 2 14 marks

Banana Spilt is 50 years old. He formed the Banana Trust (an inter vivos discretionary trust) five years
ago. The beneficiaries of the trust are his wife Parfait (who he is married out of community of property)
and his daughter Milkshake (17 years old and unmarried). The beneficiaries have a contingent right to
both the income and the capital of the trust.

Banana Split sold foreign property to the trust at market value. The purchase price was funded by a
loan made by Banana Split. The loan carries interest at a market-related interest rate. Pear Split, the
father of Banana Split, donated his portfolio of foreign shares to the trust. The portfolio consisted of
small investments (less than 10%) in diverse foreign companies.

The following information relates to the 2024 year of assessment and all foreign amounts have been
translated to rand at the average exchange rate applicable for the 2024 year of assessment:
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ACTIVITY 19.2 (continued)

Income statement of the Banana Trust R R R

Total Foreign Foreign
rentals dividends
Rentals 240 000 240 000
Foreign dividends received and not exempt in terms
of section 10B(2) 30 000 30 000
Less: Interest paid to Banana Split (200 000) (200 000)
70 000 40 000 30 000
Less: Distributed to Parfait (wife of Banana) (26 000) (15 000) (11 000)
Less: Distributed to Milkshake (daughter of
Banana) (26 000) (15 000) (11 000)
Retained income 18 000 10 000 8 000

REQUIRED: Marks
Write a short memo to all the parties involved explaining in whose hands the trust income
will be taxable. Also determine the effect on the taxable income for all the parties
concerned for the year of assessment ending 28 February 2024. You must refer to
relevant legislation. (NO marks will be awarded for calculations without the relevant 14
discussion.)

Query 3 6 marks

The Grape Trust is a discretionary inter vivos trust. On 31 January 2024, it received a distribution of
R232 000 from one of its investments during the 2024 year of assessment. This amount was the first
and final distribution received from the liquidators of a company. The company has been trading since
1998. The trustees decided to reinvest the R232 000 (see table below) in listed shares. The shares in
the company were bought with surplus trust funds on 5 January 2017 by the trust for R20 000. You
have established that the R232 000 comprises the following:

Repayment of R
Contributed Tax Capital 20 000
Capital reserves 15 000
Revenue reserves 250 000
Withholding tax paid in terms of section 64E (53 000))
Net amount 232 000

REQUIRED: Marks
Determine the normal tax liability of the Grape Trust resulting from the R232 000
distribution to the trust. 6

Query 4 12 marks

Mr. Doright, a director of one of your clients, has requested estate planning advice. He is married out of
community of property to his wife, Angel, and they have three children. Careful, his firstborn son, is 26
years old, married, and lives in Durban. His second child, Chancer, is 24 years old and is studying at a
university in America. Chancer emigrated to the United States of America (USA) in February last year after
marrying an American resident. Mr. Doright's youngest child is Cautious, a 14-year-old girl who is still in
high school.
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ACTIVITY 19.2 (continued)

As a director, Mr Doright has accumulated significant assets over the years, and he wants to ensure that
his assets are protected for his children’s benefit after he is dead. He also wants to minimize his own tax
liability by moving some of his assets to his wife or a trust as an estate planning exercise. He has always
been proud of his own reputation as a good tax citizen and has no other reason for moving his assets.
As he has enough money, he would transfer the assets at market-value but would not want it to be
funded with a loan. He cannot decide whether to create a trust while he is still alive or create it upon his
death in terms of a valid will. Mr Doright has the following assets:

Asset Date Purchase Current market Income earned –

purchased price value 2024 Year of
assessment
Family home 2010/08/31 R15 million R28 million None
– Sandton
Local share 2015/01/15 R3 million R7 million R150 000 gross
portfolio dividends
Holiday home 2012/06/01 R2.3 million R2.8 million R300 000 net rental
– Knysna (Airbnb)
Fixed deposit 2018/01/01 R5 million R5 million R250 000 interest
– FNB

REQUIRED: Marks
Advise Mr. Doright on the income tax principles to consider when deciding whether to
create a trust now (inter vivos) or upon his death (testamentary trust). Additionally, please
use a table to demonstrate and compare the tax consequences of the income received
from the assets for both options. You may assume that the trust will be a fully discretionary
trust, and the income is distributed as follows in the trust:

• Dividends – R150 000 to Chancer

• Net rental – R150 000 each to Careful and Cautious 12
• Interest income – R200 000 to Angel.

ACTIVITY 19.2 – SUGGESTED SOLUTION

Query 1 7 marks

Determine the taxable capital gain to be included in the taxable income of Soup, Beetroot and the
trust for the 2024 year of assessment. Assume that there were no other capital gains or capital
losses for the parties involved, nor any assessed capital losses brought forward from the previous
year.

It is a testamentary trust and the beneficiaries do not have any vested rights to the capital
or capital gains of the trust. Paragraph 80 of the Eighth Schedule applies. The right to the
capital gain becomes vested once the trustees have exercised their discretion to distribute
the capital gain. The gain will be taxable in the resident beneficiary’s hands, whereas the
gain distributed to the non-resident will be taxed in the hands of the trust. Remember that
the attribution rules do not apply because there was no donation.
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Calculation of taxable capital gain

Description Calculation R Marks

Proceeds 300 000
Less: Base cost (R170 000 + R6 000) (176 000) (1)
Capital gain 124 000 (1)

Soup – resident

Description Calculation R Marks

Capital gain (R124 000/2) 62 000 (1)
Less: Annual exclusion (par 5(1)) (40 000) (1)
Net capital gain 22 000
Taxable capital gain R22 000 x 40% 8 800 (1)

Beetroot

Description Calculation R Marks

Taxable capital gain Non-resident (taxed in the trust’s hands) – Nil (1)
par 80(2A)

Trust

Description Calculation R Marks

Capital gain (R124 000/2) 62 000
Taxable capital gain R62 000 x 80% 17 600 (1)
Total 7

Query 2 14 marks

Write a short memo to all the parties involved explaining in whose hands the trust income will be
taxable. Also calculate the effect on the taxable income for all the parties concerned for the year of
assessment ending 28 February 2024. You must refer to relevant legislation. (NO marks will be
awarded for calculations without the relevant discussion.)
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ACTIVITY 19.2 – SUGGESTED SOLUTION (continued)

Marks

MEMO

To: the beneficiaries and trustees of the Banana Trust (1)

From: CTA student
Date: 12 March xxx

Taxability of trust income

The beneficiaries of the trust only have contingent rights to the income (and capital) of (1)
the trust.
Trust income is taxed in terms of section 25B, subject to section 7 of the Act. (1)
A contingent right becomes vested once the trustees have exercised their discretion to (1)
distribute income or a capital gain.
The foreign property was sold at market value on loan account and it carries interest at a (1)
market-related interest rate. There was no donation, settlement or other disposition.
Section 7(2) to 7(8) will not apply to the foreign rental income received by the Banana (1)
Trust.
The foreign shares were donated by Pear (grandfather and father-in-law of the (1)
beneficiaries).
Section 7(5) will thus apply to all income from the donated foreign shares that are not (1)
distributed to the beneficiaries as there was a donation of an asset.
Thus, Pear will be taxed on the retained income of the trust relating to his donation.
Included in his gross income will be the R8 000 foreign dividend subject to (1)
section 10B(3)(b) (foreign dividend exemption) of R4 444 (25/45 of R8 000). (1)
Parfait and Milkshake’s contingent rights became vested in respect of amounts
distributed to them and they will each be taxed on the rentals of R15 000 and the foreign (1)
dividends of R11 000.
less the section 10B(3)(b) foreign dividend exemption of R6 111 (25/45 of R11 000). (1)
The trust will be taxed on the retained rental income of R10 000 because none of the
subsections of section 7 apply and the beneficiaries do not have a vested right to the (1)
retained income in terms of section 25B.
Banana will be taxed on the interest of R200 000 earned on the loan account, less the
section 10(1)(i) interest exemption of R23 800, if not already utilised by him. (1)
Total (14)

NOTE:
Note: Do not identify yourself in the memo itself. It’s against ethical principles and you may
lose valuable marks if you do so.
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ACTIVITY 19.2 – SUGGESTED SOLUTION (continued)

Query 3 6 marks

Determine the normal tax liability of the Grape Trust resulting from the R232 000 distribution to the
trust.

It is an inter vivos discretionary trust, which means that the beneficiaries do not have any
vested rights to the income or capital gains of the trust. The shares were bought with
surplus trust funds and therefore we can assume that there was no donation involved.
Section 7 cannot apply. The distribution received was also reinvested (not distributed to
the beneficiaries). Thus, the trust will be taxed.

Description Calculation R R Marks

Dividend (capital and revenue reserves) (R15 000 + R250 000) 265 000 (2)
Less: Exempt dividend (section 10(1)(k)(i)) (265 000) (1)
Capital gain: (deemed disposal in terms
of par 77)
Proceeds: Return of capital (Contributed 20 000 (1)
Tax Capital)
Less: Base cost (20 000) (1)
Capital gain Nil (1)
Normal tax liability Rnil x 45% Nil
Total 6

Query 4 12 marks

Advise Mr. Doright on the income tax principles to consider when deciding whether to create a
trust now (inter vivos) or upon his death (testamentary trust). Additionally, please use a table to
demonstrate and compare the tax consequences of the income received from the assets for both
options. You may assume that the trust will be a fully discretionary trust, and the income is
distributed as follows in the trust:

• Dividends – R150 000 to Chancer

• Net rental – R150 000 each to Careful and Cautious
Interest income – R200 000 to Angel.
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ACTIVITY 19.2 – SUGGESTED SOLUTION (continued)

Mr Doright should consider the following:

Trust Income Inter Vivos Trust Testamentary Trust Marks

R150 000 R150 000 to Chancer will be taxed R150 000 to Chancer will be taxed in (3)
gross in Mr Doright’s hands in terms of s his hands in terms of s 25B(2) read
dividends 7(8) as Chancer is a non-resident. with s 25B(1) but it will be exempt in
Mr Doright will receive the s10(1)(k) terms of s 10(1)(k).
local dividend exemption for the full
amount.
R300 000 net R150 000 to Careful will be taxed in
R150 000 to Careful will be taxed in (2)
rental (Airbnb) his hands in terms of s 25B(2) read
his hands in terms of s 25B(2) read
with s 25B(1) and s 7(1).. with s 25B(1).
R150 000 to Cautious will be taxed
R150 000 to Cautious will be taxed in (2)
in Mr Doright’s hands in terms of s
his hands in terms of s 25B(2) read
7(3) as Cautious is a minor child.
with s 25B(1).
R250 000 R200 000 distribution to Angela will
R200 000 distribution to Angela will (3)
interest be taxed in Mr Doright’s hands inbe taxed in Angela’s hands in terms
terms of s 7(2) after he receives the
of s 25B(2) read with s 25B(1) after
R23 800 interest exemption. she receives the R23 800 interest
exemption.
The R50 000 remaining in the trust The R50 000 remaining in the trust (2)
will be taxed in Mr Doright’s hands will be taxed in the trust.
as the donor in terms of s7(5).
Other Mr Doright will also have donations Mr Doright will also have estate duty (2)
considerations and capital gains implications and capital gains implications when
when he donates the assets to the he bequeaths the assets to the trust
trust. upon his death.

19.6 SOLUTION OF THE BEANCOUNTER SCENARIO

Read the Beancounter scenario again or watch the video and make a rough
summary of what your solution would be now that you have studied LU 19.
Share your solution on the Discussion Forum 19.1, then refer to the solution
that will be made available during the study week for this LU. You need to review
the solution to improve your own understanding of the tax principles involved.
The more you actively participate in these discussion forums, the more your
communication skills will develop.

19.7 SUMMARY OF LEARNING UNIT 19

This LU introduced you to the content in the Income Tax Act that is relevant to the taxation of income
earned by a trust and then distributed or retained in the trust. The taxation of income (excluding capital
gains and losses on the disposal of trust assets) earned by a trust is dealt with in section 25B of the
Income Tax Act, which is subject to the anti-avoidance rules in section 7. The attribution rules for capital
gains are dealt with in paragraphs 68 to 73 of the Eighth Schedule. The following paragraphs and
diagrams in LU19 provide short summaries:
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• 19.5.2 The flow of income and capital in a trust (diagram format).

• 19.5.4 Income from trust assets in diagram format and a summary of section 25B and the anti-
avoidance sections in section 7 in a table format.
• 19.5.5 The attribution rules of capital gains or losses owing to the disposal of trust assets in table
format.

Remember to peruse the additional resources available for this LU on myUnisa and YouTube.

The table below shows the link between the examples or activities, the specific outcomes and
assessment criteria:
Learning outcome(s) Assessment criteria Activity Activity
19.1 19.2
1. Assess the tax profile of • Determine the various tax liabilities and to
a taxpayer to determine provide reasons for the inclusion or exclusion √
the various taxes of amounts.
payable by a taxpayer. • Assess information needed to determine the
various tax liabilities, including √ √
o the role-players in the tax landscape,
o the types of taxes and their interaction
and
o the underlying principles of a tax system.
• Interpret the tax treatment of a transaction
with reference to legislation, double tax √ √
agreements and case law.
2. Advise taxpayers on the • Evaluate transactions to determine the effect
tax effect of on an individual or corporate taxpayer’s tax √ √
transactions, liability.
operations, schemes,
agreements or events
and calculate the tax
consequences thereof,
taking into account the
various taxes payable.
3. Advise on specific tax • Interpret a taxpayer’s tax profile to give ethical
and financial planning advice and provide an opinion on tax planning √
opportunities for options available within the legal framework of
individuals as well as the different tax acts, including relevant anti-
for business entities. avoidance legislation, and applicable case
law.

• Reflect on the tax consequences of shifting

income between connected persons by √ √
making use of donations, interest free loans
and trusts (e.g. section 7 and the attribution
rules) or entities (e.g. tax avoidance rules).
• Assess the role of trusts as a planning tool. √
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19.8 LIST OF REFERENCES OF LEARNING UNIT 19

• SAICA. 2024. SAICA Student Handbook 2023/2024. Volume 3. Durban: LexisNexis.
• SARS. 2024. Interpretation notes. Available at: https://www.sars.gov.za/legal-counsel/interpretation-
rulings/interpretation-notes/
• South Africa. 2023. Taxation Laws Amendment Act (Act No. 20 of 2022). Cape Town: Government
Printer
• South Africa. 2023. Taxation Laws Amendment Act (Act No. 17 of 2023). Cape Town: Government
Printer
• Stiglingh, et al. 2024. ‘Chapter 7: Natural persons’, SILKE: South African Income Tax 2024. Durban,
LexisNexis.
• Stiglingh, et al. 2024. ‘Chapter 16: Investment and funding instruments’, SILKE: South African Income
Tax 2024. Durban, LexisNexis.
• Stiglingh, et al. 2024. ‘Chapter 17: Capital gains tax (CGT)’, SILKE: South African Income Tax 2024.
Durban, LexisNexis.
• Stiglingh, et al. 2024. ‘Chapter 24: Trusts’, SILKE: South African Income Tax 2024. Durban,
LexisNexi24
• Stiglingh, et al. 2024. ‘Chapter 26: Donations tax’, SILKE: South African Income Tax 2024. Durban,
LexisNexis.

____________________________________
END OF LEARNING UNIT 19

UNISA

2024