trust deed amendments may draw tax 
08 April 2008

The Johannesburg Tax Court ruled in a case involving a trust known as T-Trust that where all the trustees and beneficiaries of a trust were substitutes, a new trust was created with significant tax consequences.

The tax court was asked to consider whether transfer duty was payable.

The trust’s primary asset was property in Houghton. In exchange for R1,9m, which was applied to discharge various loan accounts, the beneficiaries of the trust agreed to resign, and new trustees and beneficiaries were appointed.  The trust argued that it was a discretionary trust as far as the allocation and distribution of both the income and capital were concerned, and that no actual transfer of the property took place.

However, SARS contended that transfer duty was payable. The court agreed. SARS argued that the agreements were designed to avoid the payment of transfer duty and were tantamount to concealing the real character of the transaction.

The court considered the amendments to the trust deed made by the substitution of all the beneficiaries and determined that a new trust deed had been created.

T-Trust was formed with the purpose of benefiting the family of the donor, the court said. By substituting all the beneficiaries for family members of another family unrelated to the donor, a new trust had been created. The purpose of the trust as envisaged by the donor had come to an end.

The case predates amendments to tax laws made in 2002, which clearly provide that transfer duty is payable in such circumstances, said Robyn Holwill, a director at Deneys Reitz Attorneys.  “However, transactions that took place prior to December 13 2002 where no duty was paid are now vulnerable to attack by SARS, based on this recent judgment, not only is transfer duty a risk, but other transaction taxes, such as capital gains tax and stamp duty, may inadvertently become owing as a consequence of such amendments", Holwill said.

Sanchia Temkin,  www.businessday.co.za