The tiered-trust question
The conduit principle treats a trust as a pipe: a capital gain vested in a resident beneficiary is taxed in the beneficiary’s hands and disregarded in the trust. The question in Thistle was whether that pipe keeps flowing through a chain of trusts — where one trust is the beneficiary of another — all the way to the ultimate individuals.
The capital-gains conduit lives in paragraph 80(2) of the Eighth Schedule:
[W]here a capital gain is determined in respect of the disposal of an asset by a trust in a year of assessment during which a trust beneficiary . . . has a vested interest or acquires a vested interest (including an interest caused by the exercise of a discretion) in that capital gain but not in the asset, the disposal of which gave rise to the capital gain, the whole or the portion of the capital gain so vested— (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 for the purpose of calculating the aggregate capital gain or aggregate capital loss of the beneficiary in whom the gain vests.
Note — As quoted by the Constitutional Court at Thistle Trust v CSARS [2024] ZACC 19 at [4] (the wording in force for the 2014–2016 tax years). This is not the current text: paragraph 80(2) was substituted by section 52(a) of the Taxation Laws Amendment Act 23 of 2020, and now reads “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 … has a vested right or acquires a vested right … to an amount derived from that capital gain but not to the asset disposed of”. The mechanism the Court construed survives the redraft — the gain must still arise on a disposal by that trust — so the holding still applies; but check the current wording before quoting the provision in a live matter.
The facts
The Thistle Trust, an inter vivos discretionary trust, was a beneficiary of ten vesting trusts (the Zenprop group). In the 2014–2016 tax years the Zenprop trusts realised capital gains on disposing of assets and distributed the proceeds to the Thistle Trust, which then distributed them to its own beneficiaries in the same years. Thistle, relying on the conduit principle, did not account for CGT; SARS assessed it and imposed understatement penalties.
What the Court held
The Constitutional Court held that paragraph 80(2) — as amended in 2008 — governs, and that the common-law conduit cannot be used to pass a capital gain through an additional trust tier. Follow the chain: the Zenprop trusts disposed of the assets and determined the gains; those gains vested in Thistle, the first beneficiary trust, and paragraph 80(2) moved them into Thistle’s hands; but Thistle had not itself disposed of any asset, so it could not use paragraph 80(2) again to vest them in its own beneficiaries. The gain is taxed in the first beneficiary trust — on these facts Thistle, not the trusts that sold the assets — and does not cascade to the ultimate beneficiaries through an intervening trust. The Court was interpreting the statute: the restriction comes from the 2008 amendment, not from the 2024 judgment.
The 2008 amendment changed the opening of paragraph 80(2) from “where a capital gain arises in a trust” to “where a capital gain is determined in respect of the disposal of an asset by a trust” — it is that change the Court relied on to block the multi-tier conduit.
The penalty outcome
Thistle lost on the CGT merits, but it did not lose the penalties. The Supreme Court of Appeal had set the understatement penalties aside; SARS brought a conditional cross-appeal to the Constitutional Court, and the Court dismissed SARS’s application for leave to cross-appeal (order paragraphs 4 and 5, with costs against SARS). In doing so it said SARS’s penalty claim would fail on simple factual grounds — Thistle had taken its position on legal advice — and it expressly declined to decide the general meaning of a “bona fide inadvertent error”. The judgment is therefore authority for the no-tiered-conduit rule, and an illustration of the evidential value of a properly reasoned tax opinion in a penalty dispute; it does not establish that obtaining an opinion automatically eliminates penalties.
Practical effect
Keep the decision within its limits. Thistle is about capital gains under paragraph 80(2) of the Eighth Schedule. It is not a general ruling on how section 25B treats a trust’s ordinary income (rent, interest, dividends); that question is answered by section 25B’s own wording. And because the Court was interpreting the statute, check the current text of paragraph 80 for the year in question — the passage quoted above is the wording that applied to the 2014–2016 tax years.
Frequently asked questions
No. In Thistle Trust the Constitutional Court held that paragraph 80(2) — not the open-ended common-law conduit — governs a trust’s capital gain, and since the 2008 amendment it does not let a gain pass beyond the first beneficiary trust. On the Thistle facts the asset-owning Zenprop trusts’ gains vested in Thistle, which was taxable on them and could not vest them onward — it had not itself disposed of the assets. The Court was interpreting wording in place since 2008, not creating a new rule in 2024, and the decision concerns capital gains — not the section 25B treatment of a trust’s ordinary income.
No. Thistle lost on the CGT merits, but the Constitutional Court dismissed SARS’s application for leave to cross-appeal on the penalties, so the Supreme Court of Appeal’s removal of the penalties stood — Thistle had acted on legal advice. A reasoned tax opinion is important evidence; it is not an automatic immunity from penalties.
A structure where a trust is itself a beneficiary of another trust, so distributions pass through more than one trust before reaching individuals. In Thistle, ten vesting trusts distributed gains to the Thistle Trust, which distributed onward.