The Thistle Trust v CSARS (CCT 337/22)

The case revolved around the applicability of the ‘conduit principle’ to capital gains distributed by multiple trusts within the same tax year.

The Thistle Trust, an inter vivos discretionary trust, was a beneficiary of ten vesting trusts. During the 2014, 2015 and 2016 tax years, these vesting trusts realised capital gains and distributed the proceeds to the Thistle Trust, which then distributed these proceeds to its beneficiaries within the same tax years. The Thistle Trust did not declare these capital gains in its income tax returns, arguing that it was merely a conduit for the movement of gains to its beneficiaries.

The Commissioner for the South African Revenue Services (SARS) raised an assessment against the Thistle Trust for the capital gains, imposing a 50% understatement penalty and interest on the outstanding tax liability. The Thistle Trust objected, claiming that the capital gains were taxable only in the hands of the beneficiaries.

The Tax Court ruled in favour of the Thistle Trust, applying the conduit principle to the capital gains however the Constitutional Court ultimately dismissed the appeal, ruling that the conduit principle did not apply to the capital gains in question. The Court held that the Thistle Trust was liable for tax on the capital gains and that the Commissioner’s imposition of the understatement penalty was justified.

The judgement clarified the tax treatment of the capital gains in multitiered trust structures and limits the applicability of the conduit principle.

It is important to note that this case was based on the relevant legislative provisions applicable to the 2014, 2015 and 2016 tax years. Recent legislative amendments were made to clarify that the conduit principle does not apply within a multi-tier trust structure.

Read the full court case here.