• Posted on Sep 2, 2019

In the 2017 / 2018 tax year there was a tax revenue collections shortfall of R50 billion which led to the unpopular increase in VAT of 15%. So what’s next? One of the areas the South African Revenue Service (SARS) is targeting is trust accounts, the other is SMMEs.

Which is why of the 17.2 million tax submissions received by SARS, 1.6 million went to audit – that’s around 10%,’ says Willem Lombaard, MD of Task Risk Underwriting Managers. ‘And it’s probably going to get worse. The expectation is that the number of audits will increase while the quality will deteriorate, and irrational tax assessments will be made with huge penalties imposed.’

Changing the rules

‘It is no secret that SARS has identified trusts as a targeted source for extra tax revenue,’ says Graeme Saggers, Head of Tax at Nolands.’

‘Although trusts are used to provide a tax haven for taxpayers, SARS has been introducing amendments over the years to stop unfair loopholes. While not all planned amendments have been promulgated, it is generally agreed that trusts cannot and should not be used to unfairly reduce tax liabilities, and should rather be used for specific commercial reasons such as protection from creditors and asset preservation.’

Why target trusts

Saggers says, ‘More recently, SARS has identified, with the assistance of the Davis Tax Committee that non-compliance of trusts is a cause for concern. Recent statistics show that there are far more trusts registered with the Master of the High Court than those who are tax compliant with SARS. Apart from this, trust tax forms have been adapted to make sure there is more disclosure as SARS is evaluating these entities. It won’t be long before there will be an announcement of penalties for outstanding returns. These are expected to be in the form of a monthly ‘fine’ for all outstanding returns.’

It is imperative that in order to serve the trustees’ interest in the best way possible, trusts need to be tax compliant.

Saggers sets out the ‘The Big Five’ risks

  1. Trust registration and commencement
  2. Great care should be taken in drafting the Trust deed, and it should be with the assistance of someone knowledgeable in Trust law. This should not be a copy and paste template exercise. Furthermore, once a trust has been registered, the first act of the trustees should be to open a bank account to show proof of receipt of the donation that becomes the initial settlement of the trust.

  3. Independent Trustee
    • One of the biggest risks of a Trust results from its mismanagement which may result in SARS, beneficiaries or other creditors (e.g. spouse in a divorce case) attacking the trust’s legality.
    • For this reason, the Master recently issued a directive requiring the compulsory appointment of an independent trustee on all new family trusts.
    • Prof Walter Geach, Chairman of SA Prime Trustees, says ‘It is imperative that the appointment of trustees is taken seriously. They are not just there to sign legal documents but must be engaged in the oversight of the trust’s activities. It should be a hands-on approach, which is why it is best that trustees appoint and contract a professional independent trustee who will take their responsibility seriously, and who is impartial. ’

  4. Administration
  5. It is best practice to appoint a trust administration company to take control of the administration of the trust’s assets, including trust financial statements, AGM and trustee resolutions. Other responsibilities include:
    • The custody of trust records
    • Organising and recording of meetings of trustees
    • Resolutions
    • Correspondence with the Master’s Office
    • Facilitation of financial recording
    • Tax compliance processes etc.

  6. Financial records
  7. Trust financial statements are not required (unless specified in the trust deed) to be audited or to adhere to any specific accounting framework, so they can be in a simple format. Despite this Trusts do need to appropriate financial records, which also make tax compliance obligations easier to adhere to.

  8. Tax compliance
  9. Whether trusts earn income or not, it is recommended that all trusts are registered with SARS and submit annual income tax returns. This should be done as early in the year as possible to notify beneficiaries of any income distributed to them, as they would need to declare this in their personal tax returns. All trusts have a February year-end and are thus aligned with the individual tax calendar. Here are some important dates to consider:

    DATE

    REQUIREMENT

    COMMENT

    31 AUGUST

    First provisional payment due 

    This can be based to a large extent on the prior year’s taxable income. However, it is recommended to do a new estimate of taxable income.

    28 FEBRUARY

    Second provisional payment due

    An estimate should be performed of taxable income and any distributions so that these may be declared in the beneficiaries’ provisional tax return.

    31 MARCH

    Donations tax

    If there are interest-free loans to trusts, these may attract donations tax in terms of section 7C. This should be declared and paid to SARS by the end of March each year.

    1 JULY

    Trust season opens

    Trust tax returns can be filed. It is recommended to do the trust tax returns as early as possible in order to resolve any issues that may affect the beneficiaries.

    31 JANUARY

    Tax return deadline

    Trust tax returns should be filed by 31 January of the following year

Lombaard warns that ‘trusts are going to be a key focus area for SARS. Anyone involved in trust should engage with their trust administrator to ensure that all their risks are mitigated. As added protection, it is highly recommended that trusts buy tax risk insurance, as this will assist in the costs of disputing any adverse findings from SARS. Tax Risk insurance will appoint and pay for a team of top tax professionals to deal with the matter.’