1929. Capital distributions from trusts                                                                                   

In a judgment handed down on 29 November 2010 , the Supreme Court of Appeal (SCA) overturned a 

2009 decision of the tax court regarding an assessment for donations tax of some ZAR78 million plus 

interest of ZAR94 million. The court found in  The Abraham Krok Trust v CSARS  58/10 [2010] 

ZASCA 153 (not yet reported in the tax reports) that the trustees had acted within their powers in 

awarding assets in the form of loan accounts to other trusts for the benefit of beneficiaries. 

The appellant, a family trust and referred to in this article as the Krok Trust, had been in existence 

since 1973. Six beneficiaries were nominated, these being the children of the donor.  In 1981, the trust 

deed was substituted by a new deed in terms of which the assets of the taxpayer were divided into six 

equal trusts, one for the benefit of each child.  These were called the “sub-trusts” and the trust deeds 

of each stipulated that the terms of the Krok Trust would apply to them.

In 1994, another six trusts were created, one for each child, called the “1994 children’s trusts”. The 

trustees of each of the sub-trusts then entered into a sale agreement with its counterpart 1994 

children’s trust in terms of which they sold capital assets to the 1994 children’s trust at market value. 

The net result was that each 1994 children’s trust owed its counterpart sub-trust some ZAR52 million.

In 1997 the trustees of the Krok Trust (the collective name under which the sub-trusts were 

administered) decided retrospectively to 1996 to award to each of the 1994 children’s trusts an amount 

equal to the balance owing.  The awards were made by set-off against the loan accounts.

The Commissioner for SARS imposed donations tax on the awards on the grounds that the awards had 

not been made “under and in pursuance of a trust” as contemplated in the exemption provisions for 

donations tax, in that the 1994 children’s trusts were not beneficiaries of the sub-trusts – the respective 

children were. The trustees were of the view that section 56(1)(l)  of the Income Tax Act No. 58 of 

1962 (the Act), did indeed provide just that exemption.

While the matter was still in dispute, the trustees received Counsel’s opinion that the awards to the 

1994 children’s trusts might have been ultra vires, on the grounds that, because these trusts were not 

beneficiaries of the respective sub-trusts, the trustees did not have the power to make awards to them.    

The trustees decided not to act in terms of the advice and reinstate the loans as assets of the taxpayer 

and liabilities of the 1994 children’s trusts, but rather to await the outcome of the appeal, using the 

alleged invalidity and recourse to section 56(1)(l) as alternative arguments in their favour.

Although section 56(1)(l) of the  Act exempts from donations tax any donation made “under and in 

pursuance of a trust”, this exemption applies only to donations to the beneficiaries.  The reason for 

the exemption is that donations tax will already have been paid on the donation of the assets to the 

trustees. If the trustees make donations to persons other than the beneficiaries, however, these are not 

covered by the exemption.

SARS took the view that, because the 1994 children’s trusts were not beneficiaries of the sub-trusts, 

the awards were donations subject to donations tax.

In the tax court, the Krok Trust raised several arguments, which may be summarised into two 


• firstly, that the trustees had never intended to waive or renounce the debts, and their  inaction 

pending the outcome of the court case should not be so construed; 

• secondly, that if the awards were invalid, then they were a nullity and no property could have been

disposed of pursuant to them, and the set-off ought never to have taken place.

The tax court found that the conduct of the trustees, once they were aware of Counsel’s view, in not 

reinstating the loans, was evidence that they intended the awards to take place.  As for the effects of 

the invalidity, the court referred to MP Finance Group CC (in liquidation) v CSARS [2007] (69 SATC 

141) where the SCA found that the validity of a transaction is irrelevant insofar as its liability for 

income tax is concerned. There was no reason, according to the court, why a void transaction should 

not also give rise to a donations tax liability.

In the SCA the court suggested obiter that the validity or otherwise of such a transaction would not 

affect the application of the donations tax provisions, but decided that it was not necessary to pursue 

that leg of the enquiry. The court assumed in favour of the Commissioner that an unauthorised 

donation would attract donations tax and then proceeded to consider whether the donations had been 

made in terms of the trust deed and that therefore the section 56(1)(l) exemption applied. Central to 

this decision were two clauses of the trust deed: clause 11.1 provided that the income of the trust 

should be applied in such amounts and in such manner as the trustees might in their discretion 

determine for the benefit of the children and for their maintenance, well being, education, upbringing 

and reasonable pleasures; clause 12.1 empowered the trustees in their discretion to apply any portion 

of the capital of the trusts towards the purposes set out in clause 11.1. The court found that this was 

what the trustees had done, that the relevant clauses provided for this, and that therefore the awards 

had been made under and in pursuance of the trusts.  Consequently the appeal succeeded on the basis 

that the section 56(1)(l) exemption applied.

It would be interesting to know what the court would have decided had it come to the opposite 

conclusion. Firstly, would it have made its  obiter  remark a firm finding and decided that the 

unauthorised nature of the awards did not affect their validity, as seems to have been the suggestion? 

Secondly, if each 1994 children’s trust had had a class of beneficiaries extending beyond those of the 

sub-trusts, might this have rendered the transactions invalid and not under and in pursuance of the 

trusts? In this matter the beneficiary of each 1994 children’s trust was the same person as its 

counterpart sub-trust. We cannot be certain, but what is certain is that this matter would probably 

never have come to court had the trustees taken the precaution of nominating each of the 1994 

children’s trusts as a beneficiary of its counterpart sub-trust.  Here lies a lesson for all trustees.

Editorial Comment: Where trustees act outside the ambit of the trust deed, they may also be held 

personally liable for breaching fiduciary duty.

Deneys Reitz

IT Act: s 56(1)(l)