BCR 84 – Transfer of funds held in trust to a ‘beneficiary fund’

Parties:

The applicant is a resident vesting trust, established for the purpose of managing various vested sub-trusts in the interest of their beneficiaries.

The “beneficiary fund” is as defined in section 1(1) of the Pension Funds Act 24 of 1956 (“PFA”), with the objective to, on behalf of its beneficiaries, receive, administer, invest and pay benefits referred to in the PFA, which have become payable on the death of a member of a transferor fund (being a trust or a “pension fund organization” as defined in the PFA) in order to provide for the education, maintenance, advancement and wellbeing of a deceased member’s dependent beneficiaries

Description of the transaction:

The applicant proposes to transfer all of the qualifying assets and business of the trust (i.e. all assets and business that fall within the scope of business of the beneficiary fund) to the beneficiary fund to reduce costs and improve the regulatory oversight applicable to the relevant qualifying assets and business.

The proposed transfer will take place in terms of section 14 of the PFA and the trustees of the applicant will make the transfer acting in terms of a provision of the applicant’s trust deed which provides that “the trustees may in their discretion transfer any of the trust assets, including any liabilities and any obligations towards Beneficiaries to any other trust, beneficiary fund or any other approved fund, the aims of which are substantially the same as this Trust.”

Regarding the termination of a sub-trust, the trust deed provides that “upon the distribution or transfer of all the trust assets of a sub-trust, such sub-trust shall cease and shall cease to form part of the trust.”

Upon the transfer of all the assets of a sub-trust to the beneficiary fund, in terms of the proposed transaction, the beneficiary will become a member of the beneficiary fund with a fund credit equal to the value of the assets transferred to the beneficiary fund.

Ruling

The ruling made in connection with the proposed transaction is as follows:

1. The proposed transaction will not constitute a “donation” as defined in section 55(1) of the Income Tax Act 58 of 1962 (“IT Act”).
2. Section 58(1) of the IT Act (the deemed donation provision) will not be applicable to the proposed transaction.
3. Paragraph 38 of the Eighth Schedule to the IT Act (relating to inter alia disposals by way of donation or not at arm’s length) will not be applicable to the proposed transaction.
4. The proposed transaction will constitute a disposal of the beneficiaries’ rights in the individual assets of each sub-trust in exchange for rights in the beneficiary fund. For purposes of paragraph 35(1)(a) of the Eighth Schedule to the IT Act, the proceeds in respect of this disposal will comprise the market value of the interest in the beneficiary fund i.e. the value of the capital received by the beneficiary fund. Capital gains and losses on the disposal of each beneficiary’s vested rights in the trust assets must be determined on an asset-by-asset basis and the proceeds described above must be allocated to each asset based on the market value of each asset disposed of.

Find a copy of the binding class ruling here.

25 November 2023