In a recent Constitutional Court judgment, Thistle Trust v Commissioner for the South African Revenue Service [2024] ZACC19, a majority Court held that the conduit principle, which is accepted by SARS in respect of trusts did not apply to a structure used by the Thistle Trust and that capital gains tax in the case before it should be calculated at a rate of 50% (the rate for trusts, inter alia), and not 25% (the rate for individual persons).
In this matter, there was a multi-tiered trust structure with the eventual beneficiaries being individual persons. I believe there was good cause for the planners of the scheme to take this view.
According to the legislation at that time (it has subsequently been amended), the capital gains made in the upper tier trust would pass through the second-tier trust (the conduit principle) without taxation and be taxed in the hands of the final beneficiaries.
In my respectful opinion, the Constitutional Court majority judgment strained the meaning of the legislation as it then was and concluded that the capital gains tax should be caught in the second trust and taxed at 50%.
When one bears in mind that before this matter even arrived at the Constitutional Court, the Thistle Trust had already had a hearing before the Tax Court, whereafter the matter was appealed to the Supreme Court of Appeal and finally, was appealed to the Constitutional Court.
One can only guess at the costs incurred by the end of the hearing in the Constitutional Court at which the Thistle Trust was represented by three Senior Counsel. One imagines that the amount of money at stake for the eventual beneficiaries of the Thistle Trust was substantial and that the difference between paying tax on the capital gains at 50% and 25% was in the many millions of Rands.
3 Lessons We Can Learn From This Case
- It is extremely important to plan tax consequences of one’s estate. Even though the Thistle Trust structure incorporated such planning, and lost its case, it still demonstrates the enormous difference that might have been made by way of a successful structure.
- Planning of estate structures must be carried out cautiously and with proper legal advice. Even so, as the Thistle case demonstrates, a structure may be struck down and when it is, there is, at least for that Applicant, nowhere else to go.
- The Constitutional Court ruling in the Thistle case has now established a precedent for all similar structures used prior to the amendment of the relevant section of the Income Tax Act; that amendment took place in 2020. This precedent may well affect many other trusts which used a similar structure with the reasonable presumption that the structure would be successful and that the capital gains tax in a multi-tiered trust structure would be taxed in the hands of the eventual individual beneficiaries. This does not mean that another trust cannot take the torturous route all the way to the Constitutional Court and persuade the Court that the majority judgment was wrong. There is, of course, considerable risk in this approach although in my respectful view, success would not be out of the question.
Of course, not all estate planning incorporates vast amounts of money, but nevertheless good planning maximises returns to beneficiaries and minimises taxation.
The general principle in respect of taxation is that a taxpayer is not obliged to pay more tax than lawfully required and may therefore arrange its affairs in such a fashion as to minimise the consequences of tax. This arrangement of affairs must be within the law and, essentially, economically defensible as being the carrying on of business in the ordinary course.
Tax evasion is unlawful; tax avoidance is lawful. At times, the distinction between the two can become blurred and, once again, careful legal advice should be sought before arranging one’s affairs.
At Blanckenberg & Associates Incorporated we are actively engaged in the drafting of trusts and the planning of estates, the drafting of Wills and the winding-up of Deceased Estates. In all these areas, we provide a service that is both personal and unique to our client’s requirements.