Historically, the R100 000 a year donations tax exemption was popularly applied to write down trust loan accounts by estate-planning trust founders/creditors. But, as I said in 201 TSH 2019, any tax-structuring should always take cognizance of its impact upon other taxes, in this instance the CGT.
Paragraph 12A of the Eighth Schedule to the Income Tax Act imposes the CGT on a targeted ‘debt benefit’, which, simply put, is the cancellation or waiver of a debt used to fund capital expenditure.
The paragraph 12A exemption applies only to a donation ‘in respect of which donations tax is payable’. Donations tax is not payable on the s 56(2)(b) exempt amount of R100 000, thus the CGT exemption cannot apply in circumstances in which a trust founder/creditor with a credit loan account waives R100 000 a year.
It follows that, when para 12A applies, the donation is subject to the CGT in the hands of a domestically resident debtor trust.
Some commentators are of the view that, if the founder makes an annual donation to the trust and the trust uses its own funds to repay the loan by R100 000 a year, the loan account would be reduced without incurral of the CGT liability. I am not so sure that such a transaction might not be viewed as a disguised waiver of debt and ignored by SARS, either under common law, as a sham, or as an impermissible tax arrangement under s 80A.
The position, is, prima facie, different, in my view, for a nonresident trust, for the reason that a nonresident is not subject to the CGT. Under para 2 of the Eighth Schedule, for a nonresident, only immovable property situate in the RSA and assets connected with a permanent establishment in the RSA are subject to the CGT.
Thus, prima facie, the annual donations tax exemption will not be subject to the CGT in the hands of a nonresident debtor trust.
Nevertheless, para 80 of the Eighth Schedule, which applies when a resident beneficiary obtains a vested right to trust capital, could apply at a future date of vesting. Paragraph 80 provides that any amount that would have been a capital gain had the nonresident trust been a resident will be subject to the CGT.
Thus a deferred CGT event potentially arises.