Thistle Trust v Commissioner for the South Africa Revenue Service [2024] ZACC 19
The conduit principle, adopted from English law, treats a trust as a conduit for transferring taxable amounts to beneficiaries, ensuring the nature of these amounts remains unchanged for tax purposes. This principle is central to the case involving the Thistle Trust and the South African Revenue Service (SARS). Thistle, a discretionary inter vivos trust, received capital gains from the Zenprop Group, a property developer, and distributed these gains to its beneficiaries in the same tax year. Based on legal advice, Zenprop and Thistle did not report these gains in their tax returns, believing they were taxable in the hands of the ultimate beneficiaries. Thistle was successful in the Tax Court, but the Supreme Court of Appeal overturned that decision. Thistle then appealed to the Constitutional Court.
SARS argued that paragraph 80(2) of the Income Tax Act (ITA) treats the conduit principle differently from section 25B, limiting its application beyond the first beneficiary trust in a multi-tiered structure. The 2008 amendment to paragraph 80(2) aimed to prevent second-level trusts from avoiding capital gains tax by distributing gains to beneficiaries. In this case, Zenprop’s capital gain, vested in Thistle, should be included in Thistle’s aggregate capital gain, and not disregarded. Thistle, not having disposed of the asset, cannot benefit from the conduit principle as per paragraph 80(2) when distributing the benefit to its beneficiaries, as it applies only to the initial trust, Zenprop. The Constitutional Court held in SARS’s favour.
In addition, the court addressed the issue of SARS applying a penalty for under-reporting where legal advice was obtained and acted upon by the taxpayer and ruled against SARS on this point.
(Summary by FISA member Nici Macdonald)
Comment:
The case deals with the interpretation of complex provisions in the ITA and the 8th Schedule to the ITA. Interested members should read the full judgement.