Sars wins trusts battle

With a dissenting judgment and an expert lamenting the leaving out of 'bona fide inadvertent errors'.

- Amanda Visser

The South African Revenue Service (Sars) scored a victory before the Constitutional Court (ConCourt) in a case relating to the taxation of trusts and their beneficiaries on amounts distributed from the trust to the beneficiaries.

After several years of litigation before the Tax Court, the Supreme Court of Appeal and finally, the highest court in the country, the Thistle Trust must now settle a large tax bill for capital gains tax it did not declare from 2014 to 2016.

The case centred on the flowthrough (conduit) principle which governs how amounts distributed from a trust to its beneficiaries are characterised for tax purposes- as well as which of two sections of the Income Tax Act should apply to the capital gains distributed by Thistle Trust to its beneficiaries.

The conundrum

The sections in question are Section 25B and Paragraph 80(2) of the Eighth Schedule of the Income Tax Act.

According to Sars, Section 25B does not apply to capital gains but to other income that is relevant for income tax purposes.

This section was introduced into the act at a time when capital gains tax did not exist in South Africa.