The Residence of a Trust for South African Income Tax Purposes

• Jurisdiction: South Africa
• Date: 25 May 2019
• Author: Izelle du Plessis
• Published date: 25 May 2019
• Pages: 322-343

The Residence of a Trust for SouthAfrican

Income Tax Purposes

IZELLE DU PLESSIS*

University of Stellenbosch

1 Introduction

Generally speaking, since 2002 South African residents are taxed on their

world-wide receipts and accruals, but non-residents are taxed only on

their receipts and accruals from a South African source.

1

Hence, determining

whether a person can be classif‌ied as a ‘resident’ has become of primary

importance to taxpayers.

A trust is regarded as a ‘person’ for the purposes of the Income TaxAct 58

of 1962 (‘the Act’)

2

and is therefore liable to tax.

3

Consequently, it has to be

determined whether a particular trust is a ‘resident’ and thus liable for tax on

its world-wide receipts and accruals.

4

In addition, a number of anti-avoidance

provisions apply only to non-resident trusts.

5

Accordingly, a trust’s residence

has to be established to determine whether these provisions apply.

Furthermore, certain tax consequences follow when a person, which would

include a trust, becomes a resident, or ceases to be a resident.

6

How and when

a trust’s residence is determined is therefore crucial.

The purpose of this article is to discuss how the residence of a trust is

determined in terms of the Act.

7

Before the provisions of the Act relating to

residence can be analysed in relation to trusts, certain aspects of trust law

* BCom (Law) LLB (Stell) LLM (Taxation) (UCT). Senior Lecturer,Department of Mercantile Law,

University of Stellenbosch.

1

See the def‌inition of ‘gross income’ in s 1 of the IncomeTax Act 58 of 1962 (‘the Act’).

2

See the def‌inition of ‘person’ in s 1 of theAct. The def‌inition of ‘person’ was amended in 1991 after

the Court in Friedman & Others NNO v Commissioner for Inland Revenue: In re Phillip Frame Will

Trust v Commissioner for Inland Revenue 1991 (2) SA 340 (W) decided that a trust is not a person for

the purposes of the Act and therefore not taxable. This decision was conf‌irmed on appeal in

CIR v Friedman & Others NNO 1993 (1) SA 353 (A). The initial amendment of the def‌inition of

‘person’ included a description of what a trust is, but this description was deleted from the def‌inition

of ‘person’ and a new def‌inition, that of ‘trust’, following the same wording as the previous def‌inition of

‘person’, was inserted into the Act by s 2(i) ofAct 141 of 1992.

3

AP de Koker Silke on South African Income Tax LexisNexis Butterworths Intranet Resources June

2008 in par 12.14.

4

Section 25B of the Act provides that amounts received by or accrued to or in favour of any person

during the relevant year of assessment in his or her capacity as trustee of a trust shall, to the extent to

which the amount has not been derived for the immediate or future benef‌it of any ascertained

benef‌iciary who has a vested right to that amount during that year, be deemed to be an amount which

has accrued to the trust.

5

For example, s 25B(2A) and the corresponding provisions in the Eighth Schedule to the Act.

6

For example, pars 12(2)(a) and 12(4) of the Eighth Schedule to the Act.

7

This article does not deal with ‘special trusts’, or ‘personal service trusts’ as def‌ined in theAct; nor

with trusts formed by way of court order or trusts formed by way of statute or treaty; nor with trusts

subject to the Collective Investment Schemes Control Act 45 of 2002.

322

(2009) 21 SA Merc LJ 322

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must be considered. These principles will serve as a backdrop against which

the Act will be interpreted. First, certain def‌initions of a trust will be

considered. Selected aspects of the legal nature of trusts, the manner in which

trusts are formed, and some of the pertinent consequences of forming a valid

trust will also be discussed. Different types of trusts will then be

distinguished. After the relevant provisions of the Act have been analysed,

they will be applied to trusts to show how a trust’s residence is to be

determined.

2 Definitions of a Trust

Honoré def‌ines a trust as ‘a legal institution in which a person, the trustee,

subject to public supervision, holds or administers property separately from

his or her own, for the benef‌it of another person or persons or for the

furtherance of a charitable or other purpose’.

8

He further distinguishes between trusts in the wide sense and trusts in the

strict or narrow sense. A trust in the wide sense exists ‘whenever someone is

bound to hold or administer property on behalf of another or for some

impersonal object and not for his or her own benef‌it’. Examples of trustees in

the wide sense include curators of persons suffering from intellectual

incapacity and agents. By contrast, a trust in the strict sense exists ‘when the

creator or founder of the trust has handed over or is bound to hand over to

another the control of property which, or the proceeds of which, is to be

administered or disposed of by the other (the trustee or administrator) for the

benef‌it of some person other than the trustee as benef‌iciary, or for some

impersonal object’. A special feature of a trust in the narrow sense is that the

trustee holds an office.

9

A trust is def‌ined in the Trust Property Control Act (‘the TPCA’)

10

as

follows:

‘‘‘trust’’means the arrangement through which the ownership in property of one person is by

virtue of a trust instrument made over or bequeathed—

(a) to another person, the trustee, in whole or in part, to be administered or disposed of

according to the provisions of the trust instrument for the benef‌it of the person or class

of persons designated in the trust instrument or for the achievement of the object stated in

the trust instrument; or

(b) to the benef‌iciaries designated in the trust instrument, which property is placed under the

control of another person, the trustee, to be administered or disposed of according to

the provisions of the trust instrument for the benef‌it of the person or class of persons

designated in the trust instrument or for the achievement of the object stated in the trust

instrument,

but does not include the case where the property of another is to be administered by any

person as executor, tutor or curator in terms of the provisions of the Administration of Estates

Act, 1965 (Act No. 66 of 1965).’

8

Honoré’s South African Law of Trusts 5 ed (2002) by Edwin Cameron, Marius de Waal, Basil

Wunsh, Peter Solomon & Ellison Kahn (hence ‘Honoré’) at 1.

9

Idem at 4.

10

57 of 1988.

TRUST RESIDENCE FOR SOUTH AFRICAN INCOME TAXPURPOSES 323

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