011 463 5566 tonyd@harding.co.za

In 180 TSH 2018 I referred to what I described as a sui generis exception to s 7C of the Income Tax Act (deemed donation of non-charging of official rate of interest), namely a loan advance or credit in circumstances in which trustees vest an amount in a trust beneficiary but do not pay it out. It is argued that a vested right remaining unpaid is not categorized as a ‘loan advance or credit’ as is required by s 7C(1). (Usually the vesting is designed to exploit para 80 of the Eighth Schedule to the act, under which the conduit principle is applied to a realized capital gain, resulting in a lower rate of CGT in the hands of a beneficiary who is a natural person than the rate applicable to a trust.)

Arguments in support of this contention were, first, that there is no loan advance or credit in the absence of an agreement, and, secondly, the Explanation Memorandum of 15 December 2016 explicitly stated that no loan advance or credit arises when ‘that trustee has the sole discretion in terms of that trust deed regarding the timing of and the extent of any distribution to that beneficiary of such vested amount’. I expressed doubts about both of these arguments and suggested an advance tax ruling. My patience has been rewarded with the publication of Private Binding Ruling 350, of 26 August 2020. The ruling, made in connection with the  proposed transaction is as follows:

(1) Paragraph 80(2) will apply and the capital gain must be disregarded for the purpose of calculating the aggregate capital gain or loss of the trust and must be taken into account for the purpose of calculating the aggregate capital gain or loss of the beneficiary.

(2) Section 7C will not apply to the proposed transaction.

(3) Any subsequent income earned on the vested amount, or such income as will be apportioned to the vested amount, to which enjoyment has been withheld, will accrue to the beneficiary and must be included in the gross income of the beneficiary.

Although technically binding only as between SARS and the applicant taxpayer, the PBR does provide the public with an indicator of SARS approach. In summary s 7C will not apply to a beneficiary in the above circumstances.