Taxation of trusts : continued application of the conduit-pipe principle?

• Published date: 01 December 2018
• Record Number: btclq_v9_n4_a5
• Date: 01 December 2018
• Author: Wally Horak
• Pages: 20-30
• DOI: 10.10520/EJC-1348509e5c

20 © Siber ink

Taxation of Trusts:

CONTINUED APPLICATION OF THE CONDUIT-

PIPE PRINCIPLE?

WALLY HORAK*

ABSTRACT

The myriad of changes to the relevant provisions of the Income Tax Act 58

of 1962 (as amended) (‘ITA’) during the last few years have had a signif‌icant

impact on the application of the so-called ‘conduit-pipe principle’ as it applies

under common law. Further changes are envisaged under the Taxation Laws

Amendment Bill of 2018 (‘TLAB 2018’), which aim to address some of the

anomalies created by the earlier changes and to remove some exemptions.

This article considers how these rules apply to cross border distributions by

disctretionary trusts and how the proposed amendments under the TLAB

2018 will impact on such tax treatment.

The author considers to what extent the existing provisions applicable

to trusts and the proposed amendments under the TLAB, 2018 impact on

the conduit-pipe principle which applies under common law and concludes

that the statutory rules only stop the conduit f‌low to the extent that it is

specif‌ically provided by such rules. Furthermore, he submits that many of

the changes could have been avoided if the conduit-pipe principle had been

applied appropriately.

The author points out that some of the amendments and the interpreta-

tion of the provisions by SARS cause double taxation or no taxation of the

gains realised by a trust and this could not have been the intention of the

legislator. This is particularly the case where a capital gain is realised by a

resident trust and distributed to a non-resident benef‌iciary (taxed in South

Africa and in the foreign jurisdiction without foreign tax credit relief) and

where a gain realised by a non-resident trust from a foreign source is distrib-

uted to a resident benef‌iciary (no tax may be imposed on such gains).

It is submitted that the application of the conduit-pipe principle in these

cases would ensure the taxation of the amount in the hands of the person

who actually receives the gain.

The proposed amendments in the TLAB, 2018 aim to resolve some of these

anomalies, but several uncertainties remain. This may have the consequence

that entrepreneurs would be more reluctant to use trust to safeguard their

personal assets, which is a critical, non tax related motive to use a trust, which

may discourage them from taking commercial risk, which is not condusive to

the creation of new businesses and corresponding higher employment.

Introduction

The myriad of changes to the relevant provisions of the Income Tax Act

58 of 1962 (as amended) (‘ITA’) during the last few years have had a signif-

icant impact on the application of the so-called ‘conduit-pipe principle’

* Tax Executive, Bowmans, Cape Town.