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Capital Gains Tax and The Creation of Assets
In terms of the Eighth Schedule to the Income Tax Act capital gains tax ("CGT") is levied in respect of the "disposal" of any "asset" by a person. The definition of "disposal" in paragraph 11 of the Eighth Schedule to the Act includes any act which results in the creation of an asset. The issue therefore arises whether, when a beneficiary of a trust makes a capital contribution to a trust, this results in CGT for the trust. Taxand South Africa examines the issue of Capital Gains Tax and the creation of assets.
In particular whether there is a disposal by the trust through the creation of the personal rights which the beneficiary has against the trustees of the trust and whether the capital contribution made by the beneficiary constitutes proceeds in relation to such disposal. If this were the case then, on the basis that the trust does not have any base cost in the asset created, i.e. the personal rights, the capital contribution would constitute a capital gain in the hands of the trust.
Taxand South Africa explores this issue in greater detail
In light of the above, it is arguable that there is no CGT upon the creation of the rights of the beneficiaries when they become beneficiaries of the trust as there is no disposal for CGT purposes, or, should it be held that there is a disposal, such disposal is not by any person, but as a result of the multilateral juristic act involving the trustees, beneficiaries and donor.