Trusts Flashcards
Armstrong v CIR
Summary
The taxpayer was a widow who was entitled to the entire income of her late husbands estate. a Trust was formed and her interest was vested in the trustees. It was agreed that the estate would pay the trust a fixed sum per annum and the trust in turn would pay the taxpayer as beneficiary a fixed amount which constituted an annuity.
Outcome
The income from dividends were exempt from tax in the hands of the beneficiary, notwithstanding that the money constituted an annuity.
Principles
a Trust is a mere conduit pipe
CIR v Widan
Summary
The taxpayer donated certain shares in a company to a trust of which his four minor children were the beneficiaries. The Company declared a dividend to the trust and the trust used the dividend to purchase shares in a second company. When this second company declared a dividend, the issue arose whether this dividend accrued to the beneficiaries of the trust as a result of the original donation of shares made by the taxpayer to the trust.
Outcome
The original donation of shares was the cause of the income received by the trust from the second company.
Principles
The proximate cause is not the cause closest in time, but is the effective cause of the income. Therefore, income on income can fall within the provisions of section 7(3).
CIR v Berold
Summary
The taxpayer formed a number of trusts on behalf of his children to which he donated certain shares and assets. But through an intricate scheme, the taxpayers mother formed another company, the shares of which were also donated to the trust. This second company purchased the shares of the first company from the trust which had the result that the second company owned all the shares of the first, but the trust held all the shares of the second compony. When the second company declared a dividend, the Commissioner assessed the taxpayer to tax on the dividends declared by the second company under section 9(3) (now section 7(3).
Outcome
The dividend received from this second company was received as a result of the donation of shares by the taxpayer in the first company.
Principles
The effective cause of the income must be established.
