SARS recently released an updated version of a comprehensive guide to capital gains tax. This guide, which is even more comprehensive than the traditional handbooks, provide not only clear examples of how to implement CGT, but a number of new thoughts are also reflected in the guide. This is surely to become one of the foremost works on CGT for a long time. One of the significant areas of development seems to be the way in which CGT is levied in respect of trusts. In this context it is well known that the vesting of trust benefits in a beneficiary will have the result that the trust is deemed to have disposed of the asset to the beneficiary. For instance, if the trust acquired the asset for 20 and the market value of the asset is equal to 100 when vesting in the beneficiary takes place, a CGT liability of 80 arises. It is possible to move this CGT liability to a beneficiary as paragraph 80(2) of the Eight Schedule to the Income Tax Act provides that the capital gain can be ignored in the trust and taxed in the beneficiary’s hands if the gain is distributed to a resident beneficiary which does not have a prior vested interest in the asset. It should be noted that, if the beneficiary is a non-resident, capital gains tax must be accounted for in the trust.

In a significant departure in respect of prior thinking, the guide distinguishes between the position of the trust and that of the beneficiary. In this context it is indicated that, prior to the transfer of an asset to a beneficiary, a beneficiary only has a personal right against the trustees. Whenever the asset is transferred by the trust to the beneficiary, that personal right is disposed of and substituted with a real right in and to the asset. In other words, even though there is no disposal from the trust’s perspective to the extent that an asset is transferred to a beneficiary in circumstances where the asset has already vested in the beneficiary beforehand, there is a disposal on the part of the beneficiary when the asset is transferred.

The following example illustrates the principle. John is made a beneficiary of a house of the Jackson Trust in circumstances where the market value of the house is 1 000. The vesting is a disposal from the trust’s perspective. Should the trust have acquired the house for 200, a gain of 800 arises which can be accounted for either in the trust or in the hands of John. However, the house is only transferred to John when the market value thereof is equal to 1 300. When the house is transferred to John, the personal right is exchanged for a real right, being the house itself. John therefore has to account for a capital gain of 300 in these circumstances. The gain of 300 is derived as the difference between the market value of the house and the base cost of the original right that John acquired, being 1 000. Going forward, the base cost in the hands of John will be equal to 1 300. If he thereafter disposes of the house for 1 500, a gain of 200 arises.

The importance of this analysis is that, whenever there is a transfer of an asset by a trust to a beneficiary, there is no CGT consequence for the trust. However, there may well be a CGT consequence for the beneficiary in circumstances where vesting may have taken place at an earlier date. Any increase in the asset between the date of vesting and the date of transfer of the asset will thus result in a CGT liability for the beneficiary.

The same principle applies in the context of so-called business trusts. If Neil invests 1 000 in the business trust in circumstances where the 1 000 is used to buy shares, the base cost of the personal right acquired by Neil is equal to 1 000. If the shares decline thereafter in value to 700 and Neil disposes of his interest in the trust to Charlotte, Neil will suffer a loss of 300 if the sale price is equal to 700. The base cost for Charlotte will be 700. If the shares increase thereafter in value back to 1 000, there would be no gain when the trustee sells the shares. If the 1 000 is then distributed to Charlotte, she will suffer a gain of 300 as her base cost is only 700.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.