In many instances trustees abdicate their responsibilities to their accountants or tax practitioners, leaving them to manage the trust’s tax affairs. A number of accountants/tax practitioners not specialising in trusts treat them similarly to legal entities such as companies, ignoring their unique tax rules. That may get their clients (and even themselves) into trouble. With the ever-increasing focus of the South African Revenue Service (Sars) on trusts, as is evident from the extent of information requested on the respective tax returns (eg the trust, beneficiaries, donor, and funder), taxpayers should heed the warning of Sars on their website that “While voluntary compliance is our first preference, Sars is refining its capability to detect and make it hard and costly for non-compliant taxpayers.” With trustees being the representative taxpayers of trusts, they cannot claim ignorance for incorrect or even fraudulent tax returns submitted to Sars. It will be worth their while to ensure the trust’s income and capital gains are correctly treated for tax purposes.
A quick checklist for trustees
Even though it cannot be expected of trustees to all become tax experts, below is a quick checklist of typical incorrect treatment of trust income and capital gains, which may highlight possible non-compliance:
Has any South African resident individual (typically the father, mother or other family member) made a donation to the trust or retained certain rights in the trust instrument? If so, all income and capital gains resulting from such a donation (or on trust assets, the person retains the right) should be taxed in the hands of that person until their death instead of the trust itself or its beneficiaries to whom a distribution may have been made. Trustees can, therefore, not distribute such income and capital gains to beneficiaries to avoid paying taxes due on these amounts.
Was a loan at a below-market interest rate made to the trust by a South African resident individual (typically the father, mother or other family member)? If so, income and capital gains generated resulting from such a “gratuitous disposition”, limited to the interest saved by the trust as the borrower (this is the benefit caused by the non-charging of interest or the charging of interest at a below-market interest rate) will be taxed in the hands of that funder until their death, instead of the trust itself or its beneficiaries, if it is retained in the trust or distributed to the funder’s minor children or spouse. Again, one cannot distribute such income and capital gains to beneficiaries to avoid paying taxes due on these amounts. This is a complicated, cumulative calculation that should be performed for as long as the loan remains payable to the funder.
On any remaining income and capital gains “vested” in South African beneficiaries for them to pay tax on such income and capital gains, did the trustees make the actual distribution decision on or before the last day of February (the end of the tax year for the trust)? Sars regards this as a prerequisite for the trust income and capital gains to be taxed in the hands of the beneficiary instead of the trust itself. Note that this “decision” cannot be left until sometime in the future when the accountant/tax practitioner prepares the financial statements and tax returns. In practice, trustees then ‘back-date“ the resolutions, which is not allowed. As Sars warned that it would apply technology to determine the date the resolution was actually prepared, trustees should refrain from doing so.
Do the trustees keep a record of income generated on any amounts historically distributed to beneficiaries that remain payable? And do they automatically credit it to such beneficiaries’ accounts and make them pay taxes thereon? In other words, such income should not be regarded as available for distribution to others, and the trust will never be taxable on such amounts. In many instances, distributions are made to beneficiaries (often minors) to avoid paying taxes. The plan is not to make physical payments to them. That creates this requirement, which often gets ignored.
Have trustees timely communicated amounts that are taxable in the hands of the relevant persons discussed above so that they can include them in their respective tax returns – provisional tax returns due in August and February each year as well as annual tax returns?
Did the trustees submit provisional and annual tax returns and pay taxes on income and capital gains distributed to all non-tax resident beneficiaries and on amounts retained in the trust after the above rules were applied?
How can trustees come clean?
If the trustees identify issues by going through the above checklist, they can proactively approach Sars through the Voluntary Disclosure Programme (VDP). Under the Tax Administration Act 28 of 2011, Sars has established the VDP for individuals, companies or trusts that wish to voluntarily disclose and rectify their tax affairs. If they voluntarily disclose their outstanding tax affairs, they may then be granted relief from penalties and avoid possible criminal prosecution. It is best advised for trustees to approach a tax practitioner to advise and assist them.
* Phia van der Spuy is a chartered accountant with a master’s degree in tax and a registered Fiduciary Practitioner of South Africa®, a chartered tax adviser, a trust and estate practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.
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