SARS' ability to attribute trust income and capital gains to a donor parent
Carroll, Edward Daniel
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The scheme of the Income Tax Act 58 of 1962 (the Act) aims to prevent the diversion of income from the donor–parent to his minor–child. This is achieved through the deeming provisions in the Act and the attribution rules in the Capital Gains Tax (CGT) provisions. These provisions allow the South African Revenue Services (SARS) to ignore the fact that income has accrued to the minor child and to draw the income or capital gain through to a donor–parent's income. The immediate practical issue which arises from these provisions is that the Act itself does not establish any limit to the amounts that may be attributed to the donor–parent. This research examines the limits to the amount of income and capital gains that may be attributed to a donor–parent in terms of the deeming provisions in section 7(3) of the Income Tax Act (the Act) and the attribution rules set out in paragraph 69 of the Eighth Schedule to the Act. The research is conducted against the background of a case study, based on a typical estate planning strategy, in terms of which an asset is sold to a trust on an interest–free loan account basis. Three key cases being, Joss v Secretary for Inland Revenue 1980 1 SA 674 (T), Ovenstone v Secretary for Inland Revenue1980 2 SA 721 (A), and Commissioner for South African Revenue Services v Woulidge1999 4 SA 519 (C) are examined in order to establish a practical basis for apportioning income and capital gains between the donor–parent and his minor child. The conclusion reached is that there certainly are limits to the amount of income as well as capital gains that may be attributed to a donor–parent. Importantly, in the context of estate planning, the deeming provisions, contrary to perception, can be seen as a help rather than a hindrance. They provide an opportunity for diverting income and capital gains from the donor–parent to his minor child. In addition they can be utilised to deplete donor–parent's estate in favour of the minor child or trust's estate.
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