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Trusts - §7 of ITA - Coggle Diagram
Trusts - §7 of ITA
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§7(3) and (4) of ITA
§7(3)
* income to beneficiaries who are donor's minor children
- taxed in hands of donor even if accumulated in trust and not paid.
- Income deemed to be received by parent.
- real or proximate cause of income to be established.
- CIR v Widan - real efficiant cause of income "by reason" of donation.
CIR v Berold - interest free loan sufficient for §7(3) application
§7(4)
- reciprocal donations - deems income to be that of parents.
Trusts and Donations Tax
1 March 2017:
- §7C of ITA provides donation will arise if a person who is a connected person in relation to a trust,
- makes a loan, advance or grants credit to a trust and either:
a) no interest charged or
b) interest at a lower rate than official rate is charged
Official rate - defined in §1 of ITA as Repo plus 1%
- Donation is equal to difference between amount of interest in year of assessment and amount that would have been incurred at official rate of interest
Exclusions from provisions of §7C: Summary on pg 936
certain loans are specifically excluded:
- special trusts established solely for people with disabilities (para (a) of definition of "special trust")
- Trusts which are PBO's §30 of Act
- Small Business Funding entity §30C
- Vesting trusts - no discretionary rights (business/trading trust)
- Loans advanced to a trust to extent used for funds to acquire primary residence of lender or spouse of lender
- loans constituting an affected transaction subject to §31 of Act
- loans to trust in terms of Shari'ah compliant financing trans
- loan subject to anti-value stripping provisions of §64E(4) - i.e. deemed dividends
- loans iro certain employee share incentive schemes bona fide arms length ee's
Essential:
Donation, Causation,
Receipt of or accrual,
or Accumulation
§7(5)
- donor taxed on income retained in trust and clause prevents beneficiaries from receiving income until specific event occurs (e.g., age)
If beneficiary has vested right to income, §7(5) will not apply
Estate Dempers v SIR - not taxed when paid to beneficiaries
§7(6)
- Donor taxed where income received or accrued to beneficiary but donor has power to cancel right of any beneficiary to receive income or confer right on others.
- applies as long as donor retains these powers
§7(7)
Donor taxed on investment income (i.e., rent gratuitously donated to a trust) if retained right to regain the trust property in future.
§7(8)
Income received by non-resident from donation, etc, by a SA resident, deemed to be income for resident. Not required to be connected persons.
§7(9) and (10)
- §7(9) - for purpose of §7, disposal of asset less than MV is donation (difference in amount).
- §7(10) - obligation on TP to disclose donation, settlement, dispositions in year it is made.
Foreign beneficiaries
Income tax and CGT
- §7(8) - income from donation to Non Res taxed in hands of donor
- If trustee vests asset of SA Trust in non-res beneficiary, trust liable for CGT (disposal)
- trustee sells SA Trust asset and distributes gain to non res beneficiary with no vested right, trust liable for CGT - can only shift to SA res beneficiary to whom the CG is distributed or allocated
- trustee sells asset and retains gain in trust, and future year distributes gain to non-res beneficiary without vested right, gain taxed in trust in year it is made. subs distribution to non-res has no tax consequence as cash is not an asset for CGT
Trusts and "disposals" for CGT
Obvious disposals: sale, donation, loss, and:
- Trustee sells trust asset
- trustee distributes trust asset to beneficiary
- beneficiary gets vested right to trust asset - base cost is MV at time of vesting
- beneficiary sells contingent right
- beneficiary sells vested right
- beneficary's interest in trust decreased due to value-shifting arrangmement
- Para 2(e) of 8th Sch: no disposal by a trustee iro distribution of asset to beneficiary with vested interest in that asset. Instead beneficiary is regarded as having disposed of the vested right in return for the asset.