THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case No: 516/2021

In the matter between:
THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE                                                                             APPELLANT
and
THE THISTLE TRUST

RESPONDENT

Neutral citation:
CSARS v The Thistle Trust (516/2021) [2022] ZASCA 153 (7
November 2022)
Coram:
DAMBUZA ADP and VAN DER MERWE and HUGHES JJA and
GOOSEN and DAFFUE AJJA
Heard:
2 September 2022
Delivered:
7 November 2022
Summary: Revenue – capital gains tax – Income Tax Act 58 of 1962 – capital gains
determined in respect of trusts’ disposal of assets vested in a resident trust beneficiary,
who in turn made a distribution to its beneficiaries in the same year of assessment –
whether s 25B or para 80(2) of Schedule 8 is applicable – whether the appellant was
correct in imposing an understatement penalty of 50% and interest.

___________________________________________________________________

ORDER
___________________________________________________________________
On appeal from: The Tax Court, Gauteng (Wright J sitting as a court of appeal):
1 The appeal succeeds with costs.
2 The order of the Tax Court, Gauteng, is set aside and replaced with the following
order:
(a) The appeal is upheld only to the extent that the understatement penalty is
set aside.
(b) There is no order as to costs.’

___________________________________________________________________

JUDGMENT
___________________________________________________________________
Hughes JA (Dambuza ADP and Van der Merwe JA and Goosen and Daffue AJJA
concurring):
[1] This is an appeal against the decision of the Gauteng Tax Court (the tax court)
upholding an appeal against an additional assessment raised by the appellant (SARS)
against the respondent (the Thistle Trust). The appeal is with the leave of the tax court.

[2] The circumstances giving rise to the additional assessments are as follows. The
Thistle Trust is a beneficiary of various trusts that comprised the Zenprop Group. The
trusts, referred to as Tier 1 Trusts comprised a group of ten vesting trusts that conduct
the business of the Zenprop Group, a group of property owners and developers. In the
2014, 2015 and 2016 tax periods, the Tier 1 Trusts disposed of certain capital assets.
The capital gains so realised were distributed, inter alia, to the Thistle Trust in the same
tax period. The Thistle Trust, in turn, in the same tax periods, distributed the amounts
it received to its beneficiaries. It treated the proceeds received as taxable in the hands
of its beneficiaries.

[3] SARS raised an additional assessment dated 21 September 2018 for the period
2014, 2015 and 2016, taxing the amounts received by the Thistle Trust as taxable in
its hands. SARS also imposed an understatement penalty against the Thistle Trust and
required it to pay interest on the assessed liability.

[4] The Thistle Trust filed an objection to the additional assessment. The main
thrust of the objection was that:
‘having regard to the provisions of section 25B of the ITA and paragraph 80(2) of the Eighth
Schedule to the ITA (“the Eighth Schedule”), the capital gains . . . ought not to have been taxed
as our client derived no taxable income in this regard, and such gains were properly taxable in
the hands of our client’s beneficiaries under those provisions of the ITA.’

[5] SARS disallowed the objection. In March 2021, the Thistle Trust appealed to
the tax court. The tax court found that the vesting trusts (ie, the Tier 1 Trusts) had
disposed of capital assets and made capital gains. It held that the capital gains
distributed to the Thistle Trust and subsequently passed on to its beneficiaries,
constituted ‘amounts’ that fell within the purview of ss 25B(1), 25B(2), and paragraph
80(2) of the Eighth Schedule of the Income Tax Act 58 of 1962 (the ITA). Accordingly,
the distribution to the beneficiaries of the Thistle Trust was a distribution of capital gains
taxable in the hands of its beneficiaries. The tax court, therefore, set aside the
additional assessments.

The issues
[6] Two crisp issues arise. The first is whether the capital gains accrued as a result
of the disposal of capital assets by the Tier 1 Trusts are taxable in the hands of the
Thistle Trust or in the hands of the beneficiaries of the Thistle Trust to whom those
gains were distributed. The second concerns the imposition of an understatement
penalty. It arises conditionally in the event that it is found that the gains are taxable in
the hands of the Thistle Trust. In that event, the question is whether the circumstances
giving rise to the tax treatment by the Thistle Trust of the further distribution to its
beneficiaries, warrants the imposition of an understatement penalty.

The statutory framework
[7] The taxation of trusts came about as a result of the decision of CIR v Friedman
(Friedman).1 In Friedman, the court held that a trust was not a legal persona nor a
taxable entity. The practice had been that the trustees, as representative taxpayers,
were subject to the tax imposed on trust income that accrued to the trust. The court
found that since a trust was not a legal person and not a taxpayer, the trustee could

1 CIR v Friedman and Others NNO 1993 (1) SA 353 (A) at 371D-F.

not be a representative taxpayer of the trust. Following this judgment, the ITA was
amended to include a trust in the definition of a ‘person’ in s 1 of the ITA.

[8] Subsequently, s 25B was included in the ITA. The introduction of the section
was to provide for the taxation of income accrued to trusts and their beneficiaries. The
qualifier was that the trust or beneficiary concerned would only be taxed if it had a
vested right in the ‘amount’ received or accrued. Put differently, in terms of s 25B, the
trust or beneficiary had to have a vested right in the ‘amount’ received or acquired,
otherwise the amount would be taxable in the hands of the trust.

[9] Section 25B of the ITA reads:
‘(1) Any amount (other than an amount of a capital nature which is not included in gross income
or an amount contemplated in paragraph 3B of the Second Schedule) received by or accrued
to or in favour of any person during any year of assessment in his or her capacity as the trustee
of a trust, shall, subject to the provisions of section 7, to the extent to which that amount has
been derived for the immediate or future benefit of any ascertained beneficiary who has a
vested right to that amount during that year, be deemed to be an amount which has accrued
to that beneficiary, and to the extent to which that amount is not so derived, be deemed to be
an amount which has accrued to that trust.
(2) Where a beneficiary has acquired a vested right to any amount referred to in subsection
(1) in consequence of the exercise by the trustee of a discretion vested in him or her in terms
of the relevant deed of trust, agreement or will of a deceased person, that amount shall for the
purposes of that subsection be deemed to have been derived for the benefit of that beneficiary.’

[10] Capital gains tax was first introduced by s 26A of the ITA.2 The section provided
that taxable capital gains were to be determined in terms of the Eighth Schedule.3 A
capital gain is determined when the proceeds derived from the disposal of an asset
exceed that of its base cost.4

[11] Paragraph 80 of the Eighth Schedule provides for capital gain attributed to a
beneficiary as follows:
‘80(1) Subject to paragraphs 68, 69 and 71, where a trust vests an asset in a beneficiary of
that trust . . . who is a resident, and determines a capital gain in respect of that disposal or, if

2 S 26A was inserted by s 14 of the Taxation Laws Amendment Act 5 of 2001.
3 Section 26A provides that:
‘There shall be included in the taxable income of a person for a year of assessment the taxable capital
gain of that person for that year of assessment, as determined in terms of the Eighth Schedule.’
4 Paragraph 3(a) of the Eighth Schedule.

that trust is not a resident, would have determined a capital gain in respect of that disposal had
it been a resident—
(a) that capital gain must be disregarded for the purpose of calculating the aggregate capital
gain or aggregate capital loss of the trust; and
(b) that capital gain or the amount that would have been determined as a capital gain must be
taken into account as a capital gain for the purpose of calculating the aggregate capital gain
or aggregate capital loss of the beneficiary to whom that asset was so disposed of.
(2) Subject to paragraphs 64E, 68, 69 and 71, where a trust determines a capital gain in respect
of the disposal of an asset in a year of assessment during which a beneficiary of that trust
(other than any person contemplated in paragraph 62 (a) to (e)) who is a resident has a vested
right or acquires a vested right (including a right created by the exercise of a discretion) to an
amount derived from that capital gain but not to the asset disposed of, an amount that is equal
to so much of the amount to which that beneficiary of that trust is entitled in terms of that right—
(a) must be disregarded for the purpose of calculating the aggregate capital gain or aggregate
capital loss of the trust; and
(b) must be taken into account as a capital gain for the purpose of calculating the aggregate
capital gain or aggregate capital loss of that beneficiary.’ (Emphasis added.)

Submissions
[12] SARS argued that paragraph 80(2) of the Eighth Schedule applies exclusively
and that s 25B of the ITA does not apply. SARS argued that capital gains tax is
expressly dealt with in the Eighth Schedule. These provisions were introduced
subsequent to the amendments providing for the taxation of income accrued by trusts
or their beneficiaries. Section 26A, read with the Eighth Schedule, provides for a
specific form of tax and for the effect of the vesting of such capital gains as are realised
in the hands of successive trusts.

[13] SARS further argued that the proceeds of the disposal of capital assets by the
Tier 1 Trusts constituted capital gains in the hands of the Tier 1 Trusts. Those trusts,
however, distributed the capital gains to the Thistle Trust. Paragraph 80(2), therefore,
applies. The Thistle Trust acquired a vested right to the capital gains distributed to it
but acquired no vested right to the disposed capital assets. The Thistle Trust distributed
the amount it received to its beneficiaries. In doing so, it did not determine a capital
gain in respect of the disposal of a capital asset as is required by paragraph 80(2) of
the Schedule. Thus, insofar as the beneficiaries of the Thistle Trust are concerned, the
provisions of 80(2) do not apply. Section 80(2) determines the tax position of the Thistle

Trust. The capital gains accrued upon the disposal of capital assets by the Tier 1 Trusts
are, therefore, taxable in the hands of the Thistle Trust.

[14] In so far as s 25B of the ITA is concerned, SARS argued that the section does
not apply as its provisions concern the taxation of income that accrues to trusts and
their beneficiaries. It was argued that the reference to ‘amounts’ which accrues to trusts
does not include amounts or proceeds of a capital nature. Those are dealt with in the
Eighth Schedule.

[15] It was argued that the Tax Court had erred in finding that s 25B, when read in
conjunction with paragraph 80(2) of the Schedule, had the effect that the distributions
to the beneficiaries of the Thistle Trust were taxable in their hands.

[16] The Thistle Trust contended that both paragraphs 80(1) and 80(2) are
applicable. Both support a ‘see-through’ approach when dealing with the taxation of
capital gains which arises from the disposal of assets by a trust to or for the benefit of
the resident beneficiaries. The gains attained are taxable in the hands of the resident
beneficiaries. In making the argument, counsel for the Thistle Trust submitted that this
is evident on a reading of paragraph 11(1)(d), which provides that a disposal for capital
gains tax purposes includes the vesting of an interest in an asset of a trust in a
beneficiary.

[17] The Thistle Trust argued that paragraph 80(2) ought to be read with s 25B. It
submitted that ‘an amount’ in the said section is inclusive of capital gains.

Discussion
[18] The first question involves the interpretation and application of the relevant
provisions of the ITA and the Eighth Schedule to the ITA. Insofar as the interpretation
exercise is concerned, it is apposite to call to mind what this Court said in
Commissioner, South African Revenue Service v United Manganese of Kalahari (Pty)
Ltd:5

5 See C:SARS v United Manganese of Kalahari (Pty) Ltd [2020] ZASCA 16; 2020 (4) SA 428 (SCA)
para 8. See also Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; 2012
(4) SA 593 (SCA); [2012] 2 All SA 262 para 18; Airports Company South Africa v Big Five Duty Free
(Pty) Ltd and Others [2018] ZACC 33; 2019 (5) SA 1 (CC) para 29; Commissioner, South African
Revenue Service v Bosch and Another [2014] ZASCA 171; 2015 (2) SA 174 (SCA) para 9.

‘It is unnecessary to rehearse the established approach to the interpretation of statutes set out
in Endumeni and approved by the Constitutional Court in Big Five Duty Free. It is an objective
unitary process where consideration must be given to the language used in the light of the
ordinary rules of grammar and syntax; the context in which the provision appears; the apparent
purpose to which it is directed and the material known to those responsible for its production.
The approach is as applicable to taxing statutes as to any other statute. The inevitable point
of departure is the language used in the provision under consideration.’(Footnotes Omitted.)

[19] When examining ss 25B(1) and 25B(2) to determine what ‘any amount’
constitutes, the sections must be read as a whole. Section 25B(3) provides insight into
the amount that the legislator was concerned with in the application of this section.
That amount was the ‘taxable income derived by way of any amount’. Section 25B,
read in its entirety, demonstrates that the amount is of a taxable income nature and
not of a capital gains nature – ‘any amount’ will thus not include capital gains.

[20] It bears mentioning that s 25B was introduced by the legislature in 1991, while
capital gains tax came into existence in 2001. Logically, if capital gains did not exist,
s  25B could not have been intended to apply to capital gains. Further, the insertion of
‘other than an amount of a capital nature which is not included in gross income’ in the
section after any amount, which came about after capital gains was introduced, is yet
another indicator that this section does not apply to an amount of the nature of a capital
gains.

[21] Recently this Court in Milnerton Estate Ltd v CSARS stated that:6
‘. . . capital gains, the determination of the amount of any capital gain falling to be included in
the taxpayer’s taxable income is a matter dealt with in the Eighth Schedule to the Act . . . and
on its face the Schedule seems to provide a self-contained method for determining whether a
capital gain or loss has arisen.’

[22] When the provisions are read as a whole and in context, it is apparent that the
legislature intended that s 25B be applied to the taxation of income that accrues to a
trust or its beneficiaries. In contrast, the Eighth Schedule is to be applied to the taxation
of capital gains that accrue to trusts or their beneficiaries. The tax court accordingly
erred in finding that s 25B applied in this instance.

6 Milnerton Estates Ltd v CSARS [2018] ZASCA 155; 2019 (2) SA 386 (SCA) para 22.

[23] Counsel for the Thistle Trust argued that the ‘conduit-pipe principle’ was
applicable in this case. He argued from the premise that the capital gains that the Tier
1 Trusts distributed to the Thistle Trust amounted to an asset which, in fact, vested in
its beneficiaries. Therefore, so it was contended, the Thistle Trust was no more than a
conduit for the gain that flowed through it and is accordingly not subject to be taxed on
the gain.

[24] In Armstrong v the Commissioner of Inland Revenue,7 the conduit-pipe principle
was discussed for the first time. The principle became entrenched in our law in
Secretary for Inland Revenue v Rosen (Rosen).8 Rosen established that an amount or
dividend received by a trust and immediately passed on to a beneficiary in the same
year in which it was received would be regarded as having accrued to such beneficiary
as opposed to the trust that received it. The conduit-pipe would thus be open, and the
trust would be no more than a conduit for the amount or dividend to flow through. Trollip
JA cautioned in Rosen that while the principle was applicable for general application
in our tax system, it ought only to be applied in appropriate circumstances to be
determined on a case-by-case basis.

[25] The facts of this case do not support the application of the ‘conduit pipe
principle’. The Tier 1 Trusts vested the capital gains in the Thistle Trust which
accordingly held a vested right therein. The distribution to it of the accrued gains
resulted in it receiving those gains as of right. The Thistle Trust did not dispose of any
capital asset nor determine a capital gain that was distributed to its beneficiaries.
Instead, it distributed monies that vested in it as of right. In these circumstances, the
‘conduit principle’ does not apply.

[26] Paragraph 80 (2) of the Schedule, properly interpreted and applied, requires
that the capital gains accrued upon the disposal of assets by the Tier 1 Trusts are to
be taxed in the hands of the Thistle Trust and not its beneficiaries to whom it distributed
those gains. In the circumstances, SARS was correct to raise the additional
assessment for the relevant tax periods.

7 Armstrong v Commissioner of Inland Revenue 1938 AD 343 at 348-349.
8 Secretary for Inland Revenue v Rosen 1971 (1) SA 172 (A) at 190H-191A.

Understatement of penalties
[27] As indicated earlier in this judgment, the second question arises in the event
that it is found that the assessment was correctly raised. The imposition of an
understatement penalty arises when a taxpayer submits a tax return that understates
its taxable or deemed taxable income. In such circumstances, SARS is entitled to levy
a penalty based upon the circumstances giving rise to the understatement. The Tax
Administration Act 28 of 2011 (the TAA) provides that the penalty, as determined by
the TAA, is payable unless the understatement arises from a bona fide inadvertent
error.9 Section 223 of the TAA sets the relevant percentages, in a table format, to be
allocated for the different behavioural concerns of a taxpayer. These cover instances
ranging from a taxpayer failing to take reasonable care to instances where the taxpayer
is grossly negligent.

[28] In this matter, SARS imposed an understatement penalty of R1 460 092, which
translated to a penalty of 50% levied against the Thistle Trust. As set out in the table,
a penalty of 50% for a standard case relates to a taxpayer having ‘no reasonable
grounds for the “tax position” taken by the taxpayer’. It is common cause that the Thistle
Trust had obtained a legal opinion which another entity within the Zenprop Group had
sought.

[29] SARS initially adopted the position that, in the light of the legal opinion, it should
be concluded that the Thistle Trust had consciously and deliberately adopted the
position it took when it elected to distribute the amounts of the capital gains as it did.
However, during the argument before us, counsel for SARS conceded, correctly, that
the understatement by the Thistle Trust was a bona fide and inadvertent error as it had
believed that s 25B was applicable to its case. Though the Thistle Trust erred, it did so
in good faith and acted unintentionally. In the circumstances, it was conceded that
SARS was not entitled to levy the understatement penalty.

Interest
[30] Lastly, turning to the matter of interest, as the capital gains tax assessment
favours SARS, the Thistle Trust would be liable for interest accrued, in terms of

9 Section 222 (1) of the TAA provides:
‘In the event of an “understatement” by the taxpayer, the taxpayer must pay, in addition to the “tax”
payable for the relevant tax period, the understatement penalty determined under subsection (2) unless
the “understatement” results from a bona fide inadvertent error.’

s 89quat(2) of the ITA. If the taxable income exceeded, at the most, R50 000, and the
normal tax payable exceeds the credit amount in that year, interest would be payable
by the taxpayer at the prescribed rate on the amount by which normal tax exceeds the
credit amount.10 In argument before us, counsel for the Thistle Trust correctly
conceded that SARS, if successful, would be entitled to the interest claimed.

[31] As a result, I make the following order:
1 The appeal succeeds with costs.
2 The order of the Tax Court, Gauteng, is set aside and replaced with the following
order:
(a) The appeal is upheld only to the extent that the understatement penalty raised is
set aside.
(b) There is no order as to costs.’

___________________
W HUGHES
JUDGE OF APPEAL

10 Section 89quat(2):
‘(2) If the taxable income of any provisional taxpayer as finally determined for any year of assessment
exceeds –
(a) R20 000 in the case of a company; or
(b) R50 000 in the case of any person other than a company, and the normal tax payable by him in
respect of such taxable income exceeds the credit amount in relation to such year, interest shall, subject
to the provisions of subsection (3), be payable by the taxpayer at the prescribed rate on the amount by
which such normal tax exceeds the credit amount, such interest being calculated from the effective date
in relation to the said year until the date of assessment of such normal tax.’

APPEARANCES

For appellant:

M A Chohan SC
Instructed by:

Madiba Motsai Masitenyane & Githiri Inc., Johannesburg

Phatshoane Henney Attorneys, Bloemfontein.

For respondent:

T S Emslie SC
Instructed by:

Werksmans Attorneys, Johannesburg

Symington & De Kok, Bloemfontein.

THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
MEDIA SUMMARY OF JUDGMENT DELIVERED IN THE SUPREME COURT OF
APPEAL

From:
The Registrar, Supreme Court of Appeal
Date:
7 NOVEMBER 2022
Status:
Immediate

The following summary is for the benefit of the media in the reporting of this case and does not form part of
the judgments of the Supreme Court of Appeal
CSARS v The Thistle Trust (516/2021) [2022] ZASCA 153 (07 November 2022)
Today, the Supreme Court of Appeal (SCA) handed down judgment upholding an appeal against a
decision of the Gauteng Tax Court (the tax court).
The issues before the SCA were whether the capital gains accrued as a result of the disposal of capital
assets by the Tier 1 Trusts were taxable in the hands of the Thistle Trust or in the hands of its
beneficiaries and whether the circumstances that gave rise to the tax treatment by the Thistle Trust of
the further distribution to its beneficiaries, warranted the imposition of an understatement penalty.
The Thistle Trust is a beneficiary of various trusts that comprised the Zenprop Group. The trusts,
referred to as Tier 1 Trusts, comprised a group of ten vesting trusts that conduct the business of the
Zenprop Group, a group of property owners and developers. In the 2014, 2015 and 2016 tax periods,
the Tier 1 Trusts disposed of certain capital assets. The capital gains so realised were distributed, inter
alia, to the Thistle Trust in the same tax period. The Thistle Trust, in turn, in the same tax periods,
distributed the amounts it received to its beneficiaries. It treated the proceeds received as taxable in the
hands of its beneficiaries. The appellant (SARS) raised an additional assessment dated 21 September
2018 for the period 2014, 2015 and 2016, taxing the amounts received by the Thistle Trust as taxable
in its hands. SARS also imposed an understatement penalty against the Thistle Trust and required it to
pay interest on the assessed liability.
The Thistle Trust filed an objection to the additional assessment. SARS disallowed the objection. In
March 2021, the Thistle Trust appealed to the tax court. The tax court held that the capital gains
distributed to the Thistle Trust and subsequently passed on to its beneficiaries, constituted ‘amounts’
that fell within the purview of ss 25B(1), 25B(2), and paragraph 80(2) of the Eighth Schedule of the
Income Tax Act 58 of 1962 (the ITA). Accordingly, it held that the distribution to the beneficiaries of the
Thistle Trust was a distribution of capital gains taxable in the hands of its beneficiaries. The tax court,
therefore, set aside the additional assessments.
As to the first issue, the SCA held that when the provisions are read as a whole and in context, it is
apparent that the legislature intended that s 25B of the ITA be applied to the taxation of income that
accrues to a trust or its beneficiaries. In contrast, the Eighth Schedule is to be applied to the taxation of
capital gains that accrue to trusts or their beneficiaries. The tax court therefore erred in finding that
s 25B applied in this instance. The SCA found that the Tier 1 Trusts vested the capital gains in the
Thistle Trust, which accordingly held a vested right therein. Therefore paragraph 80(2) of the Schedule,
properly interpreted and applied, required that the capital gains accrued upon the disposal of assets by

the Tier 1 Trusts were to be taxed in the hands of the Thistle Trust and not its beneficiaries to whom it
distributed those gains. In the circumstances, SARS was correct to raise the additional assessment for
the relevant tax periods.
As to the second issue, the SCA held that counsel for SARS conceded, correctly, that the
understatement by the Thistle Trust was a bona fide and inadvertent error as it had believed that s 25B
was applicable to its case. Though the Thistle Trust erred, it did so in good faith and acted
unintentionally.

~~~~ends~~~~