1. Relevant provisions of the Transfer Duty Act
The following provisions of the Transfer Duty Act 40 of 1949 ("Transfer Duty Act") are relevant:
1.1 The following definitions contained in section 1 of the Transfer Duty Act:
1.1.1 'property' means land in the Republic and any fixtures thereon, and includes-
(a) any real right in land but excluding any right under a mortgage bond or a lease of property other than a lease referred to in paragraph (b) or (c);
(d) a share or member's interest in a residential property company; or
(e) a share or member's interest in a company which is a holding company (as defined in the Companies Act, 1973 (Act 61 of 1973) or as defined in the Close Corporations Act, 1984 (Act 69 of 1984), as the case may be), if that company and all of its subsidiary companies (as defined in the Companies Act, 1973, or Close Corporations Act, 1984), would be a residential property company if all such companies were regarded as a single entity;
(f) a contingent right to any residential property or share or member's interest, contemplated in paragraph (d) or (e), held by a discretionary trust (other than a special trust as defined in section 1 of the Income Tax Act, 1962 (Act 58 of 1962)), the acquisition of which is-
(i) a consequence of or attendant upon the conclusion of any agreement for consideration with regard to property held by that trust;
(ii) accompanied by the substitution or variation of that trust's loan creditors, or by the substitution or addition of any mortgage bond or mortgage bond creditor; or
(iii) accompanied by the change of any trustee of that trust;
1.1.2 'residential property' means any dwelling-house, holiday home, apartment or similar abode, improved or unimproved land zoned for residential use in the Republic (including any real right thereto), other than-
(a) an apartment complex, hotel, guesthouse or similar structure consisting of five or more units held by a person which has been used for renting to five or more persons, who are not connected persons, as defined in the Income Tax Act, 1962 (Act 58 of 1962), in relation to that person; or
(b) any 'fixed property' of a 'vendor' forming part of an 'enterprise' all as defined in section 1 of the Value-Added Tax Act, 1991 (Act 89 of 1991);
1.1.3 'transaction' means-
(c) in relation to a discretionary trust, the substitution or addition of one or more beneficiaries with a contingent right to any property of that trust, which constitutes residential property or shares or member's interest contemplated in paragraph (d) or (e) of the definition of 'property' or a contingent right contemplated in paragraph (f) of that definition;
1.1.4 'trust' means any trust consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person.
1.2 Section 2 which deals with the imposition of transfer duty in the following manner:
(1) Subject to the provisions of section 9, there shall be levied for the benefit of the National Revenue Fund a transfer duty (hereinafter referred to as the duty) on the value of any property…. acquired by any person on or after the date of commencement of this Act by way of a transaction or in any other manner…
2. Relevant provisions of the Trust Property Control Act 57 OF 1988
The following definitions contained in section 1 of the Trust Property Control Act are relevant:
'trust' means the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed-
(a) to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or
(b) to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument,
but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the provisions of the Administration of Estates Act, 1965 (Act 66 of 1965);
3. Categories of Trusts
3.1 It is clear from the definitions of 'property' and 'transaction' contained in the Transfer Duty Act that (for the purpose of determining whether the disposal of a beneficiary's interest in a trust will attract transfer duty) it is imperative that one should be able to differentiate between a "discretionary trust" and a trust which is not a discretionary trust for purposes of the act.
3.2 The Transfer Duty Act uses the term "discretionary trust" without defining it. (For the purpose of this memorandum I will accept that the "discretionary trust" to which the act refers is the one defined by P.A. Olivier 'Trustreg en Praktyk' on p 114 as one where the trustees have a discretion as to which of the beneficiaries will eventually receive the income and/or capital of the trust. The rights of the beneficiaries are therefore contingent and not vested).
3.3 The Trust Property Control Act also does not differentiate between a "discretionary trust" and a trust which is not a discretionary trust. (It does, however differentiate in its definition of "trust" between:
3.3.1 a trust where ownership of the trust assets vest in the trustees - in paragraph (a) of the definition and;
3.3.2 a trust where ownership of the trust assets vest in the beneficiary/ies - in paragraph (b) of the definition.
3.4 Cameron, de Waal and Wunsh Honorè's South African Law of Trusts' (Fifth Edition) p 9 refer to 3.3.1 as a 'ownership trust' and to 3.3.2 as a 'bewind trust'.
3.5 P.A. Olivier 'Trustreg en Praktyk' p 111 refers to 3.3.1 as a "privaat trust" and says the following of that category of trust: "Dié soort trust is eintlik die werklike uitvloeisel van die trust in regstegniese sin met die trustee as eienaar van die trustgoed en met bepaalde of bepaalbare begunstigdes." On p 114 Olivier defines a 'discretionary trust as follows: "'n Diskresionêre trust is 'n privaat trust met die besondere kenmerk dat die begunstigdes wat uiteindelik deur die inkomste an/of kapitaal van die trust bevoordeel gaan word volgens die diskresie van òf die trustees òf 'n begunsigde bepaal moet word. Dis….'n besondere verskynsel van die privaat trust." It would thus appear as if Olivier acknowledges that one does find another form of the "privaat trust" where ownership of the trust assets still vest in the trustees even if they do not have a discretion as to which of the beneficiaries will eventually receive the income and/or capital.
3.6 P.A. Olivier 'Trustreg en Praktyk' p 114 says the following regarding the practical use of a 'bewind trust': "Omdat die bewindtrust wel erkenning geniet, is dit bruikbaar in die vorm van 'n beleggingstrust wat ook 'n vorm van 'n besigheidstrust is. 'n Voorbeeld hiervan kan gevind word waar die lede van byvoorbeeld 'n prokureursfirma hulle eie gebou oprig. Dit geskied in die naam van die Omega Trust. Die vennote of hulle familietrusts is die begunstigdes en die kapitaal en inkomste en verliese van die Omega Trust vestig in die begunstigdes." I am of the opinion that Olivier's "Omega Trust" would only be a 'bewind trust' if the office building is registered in the name of the beneficiaries. If, as is much more common, the office building is registered in the name of the trustees the trust is an 'ownership trust' notwithstanding the fact that the beneficiaries have a vested right as regards the income and capital of the trust when either income and capital is distributed by the trustees. I base my opinion on the fact that the trustees, before they decided to distribute the capital of the trust, may (if they are entitled so to do in terms of the provisions of the trust deed) decide to sell the office building and buy another in the place thereof. The beneficiaries clearly never had a real right in either of the office buildings whilst the buildings are registered in the name of the trustees. Only when the trustees decide to transfer the office building to the beneficiaries do they acquire a real right. This may never happen as the trustees may decide to sell and convert the office building into cash and then to distribute the cash to the beneficiaries.
I also find support for my opinion in:
(a) Coetzee v Peet Smith Trust en andere 2003 (5) SA 674 (T) where it was said that "Die trustgoed word normaalweg aan trustees in eiendomsreg oorgedra ('n uitsondering is die geval van 'n bewind-trust)."
(b) Commissioner, South African Revenue Service v Dyefin Textiles (Pty) Ltd 2002 (4) SA 606 (N) where it was decided that the trust in question although it only had one beneficiary was "a trust properly so called, where the assets of the trust vested in the trustees, as opposed to a 'bewind' trust, where the founder made a gift or bequest directly to a beneficiary but vested the control of the assets in a trustee or administrator. The trust was a valid and binding one" (my underlining).
(c) Bafokeng Tribe v Impala Platinum Ltd and others 1999 (3) SA 517 (BH) where it was held as regards a trust deed with only one beneficiary that "there were no 'inherent ambiguities' in the affected deeds of transfer. No facts had been placed before the Court relating to a bewind trust, except the legal principles relating thereto. It appeared from the affected deeds of transfer that the dominium of the Bafokeng land vested in the various government officials whose names appeared thereon in trust for the tribe. What was involved was an ordinary trust in terms whereof the trustee and not the beneficiary had the dominium of the land" (my underlining).
3.7 As regards the 'ownership trust' I am thus of the opinion that the trust may be:
3.7.1 a discretionary trust where the trustees have a discretion as to which of the beneficiaries to benefit when income or capital is distributed (I will refer to this category of trust as a 'discretionary ownership trust') or;
3.7.2 one where the founder has given the beneficiaries fixed (or vested) rights. in the trust income and capital but where the trustees remain owners of the trust assets until they decide to distribute it to the beneficiaries ((I will refer to this category of trust as a 'non-discretionary ownership trust').
3.8 Although the said learned writers refer to and discuss many categories of trust (e.g., inter vivos as opposed to testamentary trusts, trust in the strict sense as opposed to trusts in the wide sense, family trust as opposed to business trusts, etc.), I am of the opinion that, for the purpose of determining the transfer duty implications when a beneficiary's 'interest' in a trust is disposed of, one may accept that all trusts will fall into one of the following categories:
3.8.1 the 'bewind trust';
3.8.2 the 'discretionary ownership trust' and
3.8.3 the 'non-discretionary ownership trust'.
(Kindly note that this memorandum does not deal with a 'special trusts' as defined in section 1 of the Income Tax Act, 1962 (Act 58 of 1962)).
3.9 Bewind Trusts:
If the trust in question is a bewind trust the transfer duty implications when a beneficiary's 'interest' in a trust is disposed of are easy to determine. The beneficiary thus disposing is owner (or co-owner) of the immovable property and therefore has 'a real right in land' which, in terms of the definition contained in section 1 of the Transfer Duty Act, is 'property' and which, when disposed of, will attract transfer duty regardless of whether it is 'residential property' as defined or not.
3.10 Discretionary ownership trusts:
The position as regards the disposal of a contingent right in a 'discretionary ownership trust' is provided for in the Transfer Duty act. 'Transaction' in relation to a discretionary trust, is in section 1 of the Transfer Duty Act, defined as "the substitution or addition of one or more beneficiaries with a contingent right to any property of that trust, which constitutes residential property……..". In terms of the definitions of 'residential property' and 'transaction' contained in the Transfer Duty Act transfer duty (read with section 2 of the Act), transfer duty will thus be payable if the trust in question is a 'discretionary ownership trust' where the trustees of the trust (in their capacities as trustees) are the owners of 'residential property' as defined and where beneficiaries are substituted or added in such a manner that the new beneficiaries acquire a contingent right to any residential property, the acquisition of which is-
3.10.1 a consequence of or attendant upon the conclusion of any agreement for consideration with regard to property held by that trust;
3.10.2 accompanied by the substitution or variation of that trust's loan creditors, or by the substitution or addition of any mortgage bond or mortgage bond creditor; or
3.10.3 accompanied by the change of any trustee of that trust;
3.11 'Non-discretionary ownership trusts'
The position as regards the disposal by a beneficiary of its interest in a 'non-discretionary ownership trust' is not so clear. My opinion as regards this category of trust is as follows:
The beneficiary is not the owner of the trust assets but has a vested right (as opposed to a contingent right) regarding any income or capital which the trustees may decide to distribute. If a beneficiary of such a trust disposes of its rights as beneficiary the interest disposed of is neither a "real right in land" (see paragraph 4 of this memorandum) nor is it a "contingent right in a discretionary trust" and therefore does not constitute "property" as defined in section 1 of the Transfer Duty Act.
It would thus appear (incongruent as it may seem) as if the disposal of a beneficiary's interest in a 'non-discretionary ownership trust' will not attract transfer duty.
4. Real rights in land
The "vested right" of the beneficiary of a 'non-discretionary ownership trust' is a personal right and not a real right in land because:
4.1 it is not enforceable against bona fide third parties. Should the trustees, for instance, pass a mortgage bond over the trust's property to secure the repayment of money borrowed by the trustees, the mortgagee would acquire a real right and the beneficiaries would not be able to enforce their "vested right" against the mortgagee.
4.2 It is not registrable in a Deeds Registry (In Dlamini and another v Joosten and others 2006 (3) SA 342 (SCA) the following was held as regards a real right in land: "Such a right is in principle registrable in a Deeds Registry because it constitutes a 'burden on the land' by reducing the owner's right of ownership of the land and binds successors in title" and in Erlax Properties (Pty) Ltd v Registrar of Deeds and others 1992 (1) SA 879 (A) it was held that "the right to extend" was a real right in land which therefore was, in principle, capable of registration.)
It is clear that the use of the word "discretionary trust" in the definitions of 'property' and 'transaction' in section 1 of the Transfer Duty Act was an unfortunate one and creates confusion. I would appreciate the viewpoint of other practitioners.
1. Relevant provisions of the Transfer Duty Act
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