08 October 2024 – The Commissioner for the South African Revenue Service (SARS) welcomed the Constitutional Court judgement handed down on 02 October 2024 by the Constitutional Court on the matter of The Thistle Trust v Commissioner of SARS. The matter concerned the applicability of the ‘conduit principle’ to capital gains when distributed in a multiple-tiered Trust structure in the same tax year. The Constitutional Court ruled in favour of SARS’ application of the statutes to the tax liability of the taxpayer, Thistle Trust.
The Thistle Trust, an inter vivos discretionary Trust, was a beneficiary of ten vesting Trusts. During the 2014, 2015 and 2016 tax years, the vesting Trusts realised capital gains after disposing of capital assets and distributed the realised proceeds to the Thistle Trust, which then distributed these proceeds to its beneficiaries within the same tax years. The Trust did not declare the capital gains in its income tax returns; instead, its beneficiaries declared the capital gains and paid capital gains tax on these gains.
SARS raised an assessment against the Thistle Trust for the above-mentioned years for capital gains that had accrued to the Thistle Trust. SARS also imposed a 50% understatement penalty and required the Thistle Trust to pay interest on the outstanding tax liability. The Thistle Trust objected to the assessment on the basis that the Thistle Trust was merely a conduit for the movement of gains to its beneficiaries which, in terms of the common law and the Income Tax Act at the time, were taxable in the hands of only the beneficiaries. The objection was subsequently disallowed.
The Thistle Trust approached the Tax Court who found in the Trust’s favour. SARS appealed to the Supreme Court of Appeal (SCA). The SCA set aside the order of the Tax Court in so far as it applied to the issue of the tax liability and held that the conduit principle did not apply beyond the Thistle Trust, and that the Trust was accordingly liable for the capital gains tax. However, it upheld the objection of the Thistle Trust on the issue of the imposition of an understatement penalty. No costs were ordered.
The Thistle Trust appealed to the Constitutional Court on the issue of its tax liability. The majority judgment dismissed Thistle Trust’s appeal on the issue of its tax liability. SARS’ conditional application for leave to cross-appeal on the issue of levying the understatement penalty was also dismissed as the Constitutional Court found that it was not in the interests of justice for the court to sit as a court of first and last instance to determine a legal issue that would have no bearing on the outcome of the appeal. Prior to arriving at this decision, the court found that the tax position taken by the Thistle Trust was one taken on legal advice and not only was it reasonable, but it was one that was upheld in a reasoned Tax Court judgment. Further, that the argument advanced by SARS in respect of the lack of reasonable care in completing a return would elevate SARS to the status of an authority that can decree the only reasonable interpretation of tax legislation. The court went on to impose a cost order against SARS on the matter of understatement penalty. SARS respects this order by the court, and continue to explore the criteria on which understated penalties are based and provide greater clarity in this regard.
SARS Commissioner, Mr. Edward Kieswetter, said that “this judgement reaffirms SARS’ correct decision in attributing tax liability to the Trust in a multilayered Trusts structure. Additionally, the judgement further provides clarity and certainty on how capital gains distributed by a Trust to beneficiaries should be treated by Trustees in a similar position”.
Full judgment of Thistle Trust v Commissioner for the South African Revenue Service (concourt.org.za).
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