BPR 423: Payments by a Company to a Union Are Dividends, Not Donations
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A Binding Private Ruling (BPR) is a formal interpretation issued by SARS at the request of a taxpayer, providing legal certainty about how specific provisions of the tax law apply to a proposed transaction. Once issued, it’s binding on SARS and the applicant, as long as the transaction follows the facts as presented. For tax practitioners, BPRs offer valuable insights into SARS’s thinking and can be used to:
Evaluate similar client scenarios
Anticipate risk in structuring transactions, and
Understand how SARS interprets definitions like “dividend” or “donation.”
The structure in BPR 423: A company, a trust, and a trade union
In this case:
The Applicant: A South African company.
The Trust: A South African trust, which is the sole shareholder of the company.
The Union: A registered trade union, which is the sole beneficiary and founder of the trust. The Union is also a tax-exempt body under section 10(1)(d)(iii) of the Income Tax Act.
The company was set up to invest surplus funds from the Union and support the Union financially. The trust structure ensured the company always operated for the benefit of the Union. The company proposed to:
Make annual payments to the Union, or
Incur expenditures on the Union’s behalf (e.g. operating costs),
with no expectation of anything in return.
The company asked SARS to confirm whether these payments would count as “donations” (under section 55(1)).
The ruling by SARS
SARS ruled that:
The payments are NOT donations.
Even though no consideration is received, the payments don’t meet the legal definition of a “donation.”The payments ARE dividends.
Because the Union is the sole beneficiary of the Trust, and the Trust is the sole shareholder, the flow of funds from the company to the Union passes through the shareholding structure. So, for tax purposes, these payments are treated as dividends paid to the shareholder (the Trust).
This means that even though the Union isn’t a direct shareholder, the benefit it receives is seen as a distribution by the company to its shareholder, and is taxed accordingly.
Key Takeaways
Substance over form matters. Even if a payment looks like a donation, SARS may classify it differently based on underlying structures.
Corporate structures involving trusts and PBOs need careful VAT and income tax planning, especially if distributions are being made outside the typical shareholder route.
Dividends can exist even without cash going to a registered shareholder, if the structure funnels value to beneficiaries.
Don't assume “no consideration” equals a donation. SARS looks closely at relationships and intent.
