Awards from foreign trusts

The South African Revenue Service (SARS) published Binding Private Ruling No 197 (Ruling) on 1 July 2015. The Ruling deals with the receipt of funds from a foreign trust, and the subsequent donation and investment thereof.

The applicant was an individual resident in South Africa. The applicant was also a beneficiary of a foreign trust. The foreign trust only held funds sourced from outside South Africa.

The trustees of the foreign trust resolved to award a specified amount of the foreign trust funds to the applicant, after which the applicant would be removed as a beneficiary.

The funds so awarded would be transferred to the applicant's foreign bank account, after which the applicant would:

• donate some of the funds to certain individuals; and

• invest the balance in a property outside South Africa.

Firstly, SARS ruled that the award of the funds by the foreign trust would not be subject to income tax in the hands of the applicant. Unfortunately SARS did not elaborate on the issue, but it appears that the amount awarded to the applicant would not have fallen within the ambit of s25B(2A) of the Income Tax Act, No 58 of 1962 (Act), and would simply be treated as a capital receipt.

Secondly, SARS ruled that the anticipated donations would be exempt from donations tax because of the exemption contained in s56(1)(g)(ii) of the Act. This provision applies where the property that is being donated constitutes a right in property situated outside of South Africa (such as the foreign funds), and it was acquired by the donor “…by inheritance from a person who at the date of his death was not ordinarily resident in the Republic or by a donation if at the date of the donation the donor was a person (other than a company) not ordinarily resident in the Republic…”

Unfortunately the Ruling does not reveal whether the foreign trust was a testamentary trust and whether the award of the foreign funds was seen as having been acquired by way of inheritance. The Ruling also does not specify whether the award by the foreign trust was seen as a donation by a non-resident donor.

Thirdly, SARS ruled that the balance of the award, which would be used to acquire a foreign property, would not be included in the estate of the applicant for estate duty purposes because of the application of s4(e)(ii)(aa) or (iii) of the Estate Duty Act, No 45 of 1955.

The said provision excludes any right to property situated outside of South Africa acquired by a deceased:

“(ii)    after he became ordinarily resident in the Republic for the first time, by:

(aa)   a donation if at the date of the donation the donor was a person (other than a company) not ordinarily resident in the Republic; or

(bb)   inheritance from a person who at the date of his death was not ordinarily resident in the Republic; or

(iii)   out of the profits and proceeds of any such property proved to the satisfaction of the Commissioner to have been acquired out of such  profits or proceeds…”

Again, the Ruling is not specific as to whether the award is seen as an inheritance or a donation.

It was also specifically noted in the Ruling that SARS would not rule on whether the proposed transaction formed part of any arrangement for the avoidance of tax.

SARS indicated that the Ruling would be valid for a period of approximately ten years, but it is submitted that, since the Ruling concerned the application of the Estate Duty Act at the time of the death of the applicant, it should have been extended until such time.