The Abraham Krok Trust v The Commissioner for the South African Revenue Service

In 1973, Ms Sarah Krok created The Abraham Krok Trust for the benefit of six children through a notarial deed of donation. In 1981, the trust deed was revoked and replaced, with the assets deemed divided into six separate trusts (the '1981 trusts'), one for each child, though administered collectively under The Abraham Krok Trust name. In 1994, Mr Abraham Krok executed six new trust deeds (the '1994 trusts'), also for the benefit of the same children. Each 1981 trust sold stipulated assets to its counterpart 1994 trust for R61,635,174, with the balance of R52,455,232 treated as a loan. In 1997, the trustees of the 1981 trusts made an 'award' of R52,455,232 to each corresponding 1994 trust, retroactive to the 1996 tax year, which was set off against the outstanding loans. The Commissioner assessed The Abraham Krok Trust for donations tax totaling R78,682,849 plus R93,862,092 in interest for the 1996 tax year. The trusts objected but the Commissioner dismissed the objections. The tax court dismissed the appeal.

• Whether the 'awards' made by the 1981 trusts to the 1994 trusts constituted donations subject to donations tax under section 54 of the Income Tax Act 58 of 1962
• Whether the disposals were authorised by the trust deed
• Whether the disposals, if authorised, fell within the exemption from donations tax under section 56(1)(l) of the Income Tax Act for property disposed of 'under and in pursuance of any trust'
• Whether the tax court was competent to pronounce upon the validity of the disposals for tax purposes
• The proper construction of clauses 11.1, 12.1, 11.2, 11.3 and 12.2 of the 1981 trust deed

The appeal was upheld and the cross-appeal was dismissed, in both cases with costs including the costs of two counsel. The order of the tax court was set aside and substituted by an order setting the assessment aside.

Where trustees dispose of trust property to beneficiaries, and the trust deed confers upon trustees discretion in clear terms to apply capital for the benefit of beneficiaries, such disposals are made 'under and in pursuance of any trust' as contemplated by section 56(1)(l) of the Income Tax Act and are therefore exempt from donations tax. The proper construction of a trust deed to determine whether trustees are authorised to make disposals is a question of law to be determined on the plain meaning of the trust deed's terms. Clauses in a trust deed that regulate the manner in which income is to be dealt with do not necessarily restrict the purposes for which capital may be applied under separate clauses authorising capital distributions.

The Court observed that it is not usual for a court to pronounce upon the validity of a bilateral transaction if all interested parties are not before it, which they usually will not be in tax proceedings. This suggested to the Court that the legislature likely did not intend section 54 to apply only to authorised donations (as submitted by the trustees) nor to exempt from donations tax only authorised donations (as submitted by the Commissioner), and thus the validity or invalidity of the transaction would be irrelevant. However, the Court did not definitively resolve this question as it was unnecessary to do so. The Court also noted interesting questions of construction that were raised regarding the proper interpretation of sections 54, 55 and 56 but expressly stated these need not be resolved on the view taken of the matter. The Court assumed in favor of the Commissioner that the exemption applied only to donations the trustees were authorised to make, and that the tax court was competent to pronounce on that question, but these assumptions were not binding determinations.

This case provides important guidance on the interpretation of section 56(1)(l) of the Income Tax Act 58 of 1962, which exempts from donations tax property disposed of 'under and in pursuance of any trust'. The case clarifies the importance of proper construction of trust deeds in determining whether trustees are authorised to make disposals and whether such disposals qualify for exemption from donations tax. The judgment confirms the approach taken in Welch's Estate v Commissioner, South African Revenue Service 2005 (4) SA 173 (SCA) that the purpose of section 56(1)(l) is to avoid levying donations tax twice upon what is essentially one donation by the original donor. The case demonstrates that when material facts are not in dispute, the question of authorisation is a matter of construction of the trust deed upon which the burden of proof does not apply. It also illustrates the courts' approach to interpreting trust deeds in tax matters, favoring a natural reading of clear language over strained constructions.