Settlement

Tutorial 2

Advanced Taxation / BAC 4644

Settlement

Question 1

Why do you think a ‘settlement’ is of concern to the Revenue authorities?

Answer 1

A wealthy person (the settlor) on a high tax bracket may choose to transfer either properties or income or both to another person (the beneficiary) to benefit from the lower tax bracket of the beneficiary.

This essentially is a tax avoidance scheme that has no commercial or arm’s length consideration and therefore is generally disallowed for tax purposes under section 65.

In this context one needs to understand the concept of settlement, settlor, relative and reciprocal settlement, and exceptions to the application of section 65(1) as well as a revocable settlement and its implication for tax.

Question 2

In the context of the Income Tax Act 1967 (as amended) explain the significance of the following terms for income tax purposes, in your own words:

1. Settlement
2. Settlor
3. Relative
4. Reciprocal settlement
5. Revocable settlement

Answer 2

A ‘settlement’ includes any disposition, trust, covenant, arrangement or agreement and any transfer of assets or income but does not include –

1. A settlement which in the opinion of the Director General of Inland Revenue is made for valuable and adequate considerations
2. A settlement resulting from an order of a court; or
3. Any agreement made by an employer to pay to an employee or to the widow or any relative, dependents of an employee after his death such remuneration, pension, or lump sums as in the opinion of the Director General of Inland Revenue is fair and reasonable.

‘Settlor’ in relation to a settlement includes any person by whom the settlement was made or entered into directly or indirectly and any person who was provided or undertaken to provide funds or credit directly or indirectly for the purpose of the settlement or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement.

‘Relative’ means a child of the settlor (including a step child of the settlor and a child over whom the settlor has custody or whom he maintains wholly or partly at his own expense), a child adopted by the settlor, or the husband or the wife of the settlor in accordance with any law and any person who is a wife, grandchild, brother, sister, uncle, aunt, nephew, niece or cousin of the settlor.  

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