In a binding private ruling issued on 25 October 2012 (BPR 125), SARS was asked to rule primarily on the application of paragraph 80(1) read with paragraph 63 of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (Act).

Briefly, the facts were as follows:

A resident discretionary trust (Trust) holds 100% of the equity shares in a resident private company (Company). One of the beneficiaries of the trust is recognised as a traditional community under s2 of the Traditional Leadership and Governance Framework Act, No 41 of 2003 and is exempt from normal tax under s10(1)(t)(vii) of the Act. It was proposed that the trustees of the trust will, in the exercise of their discretion, distribute dividend rights in respect of the shares held in the Company to the traditional community.

Essentially, paragraph 80(1) of the Eighth Schedule to the Act provides that where a capital gain is determined in respect of the vesting by a trust of an asset in a trust beneficiary (other than the Government, a provincial administration, organisation, person or club contemplated in paragraph 62(a) to (e)) who is a resident, that gain:

• must be disregarded for the purpose of calculating the aggregate capital gain or aggregate capital loss of the trust; and
• must be taken into account for the purpose of calculating the aggregate capital gain or aggregate capital loss of the beneficiary to whom that asset was so disposed of.

It will be noted that paragraph 80 is peremptory in that it provides that any capital gain must be disregarded by the trust and must be taken into account by the resident beneficiary to whom that asset was disposed. Paragraph 80(1) thus recognises the conduit principle and determines that the gain which arises flows through the trust and is taken into account in the hands of the beneficiary.

Any capital gain arising on the vesting of an asset by a trust in the Government, a provincial administration, organisation, person or club contemplated in paragraph 62(a) to (e) cannot be attributed to such bodies under paragraph 80(1) since they are specifically excluded from its ambit. As a consequence, capital gains arising from a vesting in such bodies remain in the trust.
The traditional community, although constituting a body exempt from tax under s10(1)(t)(vii) of the Act, does not fall within the ambit of the bodies contemplated in paragraph 62(a) to (e). As a result, any capital gain arising from the distribution of the dividend rights must be taken into account in determining the aggregate capital gain or loss of the traditional community and must be disregarded by the Trust.

However, the enquiry does not end there. Paragraph 63 of the Eighth Schedule provides that a person must disregard any capital gain or loss in respect of the disposal of an asset where any amount constituting gross income of whatever nature would be exempt from tax in terms of s10 were it to be received by or to accrue to that person. It is not entirely clear whether paragraph 63 applies only to disposals by the exempt body or whether, for instance, it also applies to a disposal by the trustees of a trust by way of the vesting of an asset in an exempt body.

Applying the provisions of paragraph 80(1) read with paragraph 63 Schedule, SARS confirmed in BPR 125 that the vesting of the dividend rights by the Trust in the traditional community will not be subject to capital gains tax in the hands of the Trust, in terms of paragraph 80(1) of the Eighth Schedule. Furthermore, in terms of paragraph 63 of the Eighth Schedule, any capital gains arising from the vesting of the dividend rights will not give rise to any capital gains tax liability in the hands of the traditional community, given that its receipts and accruals are exempt from normal tax under s10(1)(t)(vii). In other words, it is implicit in the ruling that paragraph 63 also applies to capital gains arising pursuant to the attribution thereof in accordance with paragraph 80(1) of the Eighth Schedule to the Act and is not limited to disposals by the exempt body.

SARS also confirmed that, as the traditional community will be regarded as the 'beneficial owner' of any dividends declared by the Company, the Company will not be required to withhold dividends tax from any dividends paid to the Trust, provided that the Trust has by the date determined by the Company, or by the date of payment of the dividend, submitted a declaration to the Company that the dividend amount is exempt from dividends tax under s64F(g) as well as a written undertaking to inform the Company should the traditional community cease to be the beneficial owner of the dividend.

BPR125 serves as a useful illustration of the interplay between paragraph 80(1) and paragraph 63 of the Eighth Schedule to the Act. Although paragraph 80(1) is peremptory and provides that any capital must be taken into account by the beneficiary, i circumstances where the beneficiary is exempt from tax in terms of s10 of the Act, no capital gains tax will be payable by either the trust or the beneficiary.

It should be appreciated that the statutory conduit principle as contained in paragraph 80(1) gives way to the special attribution rules contained in paragraphs 68 (attribution of capital gain to spouse), 69 (attribution of capital gain to parent of minor child), 71 (attribution of capital gain subject to conditional vesting) and 72 (attribution of capital gain vesting in a person who is not a resident) of the Eighth Schedule which, if applicable, will override paragraph 80(1).

Written by Andrew Seaber, Senior Associate, Tax, Cliffe Dekker Hofmeyr