Reportable arrangements specifically extended to foreign trust structures

On 16 March 2015, the Commissioner for the South African Revenue Service (SARS) published Government Notice No. 212 in terms of s35(2) and s36(4) of the Tax Administration Act No, 28 of 2011 (TAA) specifically listing certain arrangements as so-called reportable arrangements (Notice). These listed arrangements are in addition to the arrangements that are already listed in s35(1) of the TAA.

The effect of an arrangement being regarded as a reportable arrangement for purposes of s35 of the TAA read with the Notice is that, in terms of s37 of the TAA, a participant must disclose certain information to SARS within 45 business days of any arrangement qualifying as a reportable arrangement for purposes of the TAA or, disclose the information within

45 days from the date of becoming a participant to that reportable arrangement. In terms of s37(3) of the TAA, a participant does not need to disclose the listed information if the participant obtains a written statement from any other participant that the other participant has disclosed the reportable arrangement.

One of the problematic arrangements listed in the Notice is:

"Any arrangement in terms of which –

(a)     a person that is a resident makes any contribution or payment on or after the date of publication of this notice to a trust that is not a resident and has or acquires a beneficial interest in that trust; and

(b)     the amount of all contributions or payments, whether made before or after the date of publication of this notice, or the value of that interest exceeds or is reasonably expected to exceed R10 million, excluding any contributions or payments made to or beneficial interest acquired in any –

• (i)     portfolio comprised in any investment scheme contemplated in paragraph (e)(ii) of the definition of “company” in section 1(1) of the Income Tax Act, 1962; or
• (ii)      foreign investment entity as defined in section 1(1) of the Income Tax Act, 1962".

One of the requirements for an arrangement relating to a foreign trust structure to fall within the ambit of the Notice is that a South African tax resident must have or acquire a 'beneficial interest' in the trust. The difficulty with determining whether one meets this requirement is that it is not clear what exactly is meant by the words 'beneficial interest', as this term is not defined in the TAA or the Income Tax Act, No 58 of 1962. These words are therefore open to interpretation.

This is particularly relevant in the instance of a discretionary trust where the trustees are afforded a discretion whether to vest any income or capital in a beneficiary of the offshore trust. In instances where the offshore trust is a discretionary trust, it is arguable that a beneficiary of the trust may not have a beneficial interest in the offshore trust, as any interest which that beneficiary may or may not receive is completely within the discretion of the trustees and therefore not certain until such time as the discretion is exercised. Therefore, a specific beneficiary may never gain a 'beneficial interest' in the offshore trust to the extent that the trustees exercise their discretion by never vesting any capital or income in such beneficiary. This appears to be in line with the decision of Commissioner for Inland Revenue v Estate Merensky (1959) 2 All SA 501 (A), although the point was not specifically argued in that case.

The SARS Comprehensive Guide to Capital Gains Tax (Issue 5) appears to provide some support for the argument that a beneficiary to a discretionary trust has a contingent right, but that this right is no more than a spes (hope or an expectation) until the trustees have exercised their discretion and the assets are vested in the beneficiary. It appears to be SARS’ understanding that, as the beneficiaries of a discretionary trust hold no more than a spes until the exercise of the discretion by the trustees and the vesting of assets in the beneficiaries, the beneficiaries have no beneficial interest in the trust as the value of their rights cannot be quantified until the assets are vested in them.

However, there is also a counter-argument, namely that it may be SARS' intention to include any beneficial interest in a discretionary trust in the term 'beneficial interest,' otherwise SARS would have expressly excluded this scenario in the Notice.

The impact and application of the Notice in respect of offshore trusts therefore appears to be somewhat uncertain and open to interpretation. At this stage it certainly seems possible to argue the matter either way.