The Commissioner for the South African Revenue Service v The Thistle Trust

The Thistle Trust was a beneficiary of several vesting trusts within the Zenprop Group (Tier 1 Trusts). During the 2014, 2015 and 2016 tax years, the Tier 1 Trusts disposed of capital assets and realised capital gains. These gains were distributed to the Thistle Trust in the same tax years. The Thistle Trust, in turn, distributed the amounts received to its own beneficiaries in the same years and treated the gains as taxable in the hands of those beneficiaries. SARS issued additional assessments taxing the capital gains in the hands of the Thistle Trust and imposed a 50% understatement penalty and interest. The Thistle Trust objected, contending that section 25B of the Income Tax Act 58 of 1962 read with paragraph 80(2) of the Eighth Schedule required the gains to be taxed in the hands of its beneficiaries. The Tax Court upheld the Trust’s appeal, prompting SARS to appeal to the Supreme Court of Appeal.

The appeal by SARS succeeded with costs. The Tax Court’s order was set aside and replaced with an order upholding the additional assessments for capital gains tax, setting aside the understatement penalty, and making no order as to costs.

The case clarifies the relationship between section 25B of the Income Tax Act and the Eighth Schedule, confirming that section 25B does not apply to capital gains. It affirms that the Eighth Schedule provides a self-contained regime for taxing capital gains in trust structures and limits the application of the conduit-pipe principle in capital gains tax contexts. The judgment provides important guidance on the taxation of multi-tier trust arrangements and the circumstances under which understatement penalties may be remitted.