Trust-to-trust: Transfer Duty considerations for trust beneficiaries

Jul 12, 2021 | Article

This is a very useful article by Phia van der Spuy and it is important to bear in mind the Transfer Duty implications for the acquirer of immovable property from the Trustees in certain circumstance.

 

TRANSFER Duty is an indirect tax levied on the acquisition of fixed property in South Africa.

It is payable on the value of any property acquired by a person by way of a transaction or in any other manner. Transfer Duty is not payable on the transfer of the property that gave rise to Transfer Duty.

Instead, it is the acquisition of the personal right by the purchaser against the seller that gives rise to the Transfer Duty obligation. The Court held in the CIR versus Freddies Consolidated Mines Ltd case of 1957 that the word “acquired” (which is required for a “transaction” to take place under the Transfer Duty Act) means the acquisition of a “right to acquire ownership in a property”.

The judge confirmed in the SIR versus Hartzenberg case of 1966 that Transfer Duty becomes payable upon the acquisition by a person of a personal right to obtain dominium (ownership and control) in immovable property.

With a vesting trust where the beneficiary has a vested right in the trust income (both of a revenue and capital nature) and/or capital in terms of the trust instrument, or a discretionary trust where the trustees exercised their discretion in favour of the beneficiary and the beneficiary obtained a vested right in the trust capital, they will obtain only a personal right against the trustees.

No Transfer Duty is payable when a beneficiary obtains a personal right from the vesting of trust capital because no specific property was vested. Even though a beneficiary may have a vested right in trust capital, the trustees may (if they are entitled to do so under the provisions of the trust instrument) decide to sell the property (and even buy another in its place). In this case, it is clear that the beneficiary never had a real right in either of the properties while they were registered in the names of the trustees.

Only when the trustees decide to transfer a property to a beneficiary do they acquire a real right. This might never happen if the trustees decide to sell and convert the property into cash and then distribute such cash to the beneficiaries. The beneficiary will obtain a real right in the trust asset as soon as ownership in such asset is transferred to the beneficiary. If property is transferred to the beneficiary, they will be liable for Transfer Duty once it is transferred.

In the event of the trustees electing to vest immovable property in the name of a beneficiary of an ownership inter vivos trust (which includes a vesting trust and a discretionary trust) by transferring the property into the name of that beneficiary in the Deeds Registry, the transfer is exempt from Transfer Duty provided the beneficiary is related to the founder or creator of the trust by blood within three degrees of consanguinity and the beneficiary paid no consideration (directly or indirectly) for the property (Section 9(4)(b) of the Transfer Duty Act).

In the event of the trustees electing to vest immovable property in the name of a beneficiary of a testamentary trust by transferring the property into the name of that beneficiary in the Deeds Registry, the transfer is exempt from Transfer Duty provided the beneficiary is entitled to it under the will in terms of which the trust was set up. (Section 9(4)(b) of the Transfer Duty Act).

Beneficiaries are not the owners of the trust assets in an ownership trust (which includes a vesting trust and a discretionary trust), but have a vested right with regard to any capital distributed by the trustees.

If a beneficiary disposes of this right, it is not a “real right in land” or a “contingent right in a discretionary trust” and, therefore, does not fall within the ambit of “property” as defined in Section 1 of the Transfer Duty Act.

However, when a beneficiary disposes of their contingent right in a discretionary trust – such as when beneficiaries are substituted during the amendment of a trust instrument – not only may it be argued that a new trust may have come into existence as a result thereof (with Capital Gains Tax and other potential tax consequences), but it may trigger Transfer Duty as a result of the “substitution or addition of one or more beneficiaries with a contingent right to any property of that trust, which constitutes residential property”(Section 1 of the Transfer Duty Act).

Since there is no definition of “residential property trust”, the provisions would apply to a trust owning residential property regardless of the proportion of such property to the full value of the assets held by the trust. In this instance, the Transfer Duty is based on the full market value of the residential property, regardless of the interest the person acquires in the trust.

Therefore, any indirect transfer of immovable residential property (primarily to avoid Transfer Duty) becomes taxable in the same manner as any direct transfer of the property out of the trust.