“The common assumption is that trusts are some kind of tax panacea…Then, conversely, from a South African Revenue Service (SARS) perspective, trusts are viewed with a degree of suspicion and mistrust. [T]he truth lies somewhere between these positions.” (Broomberg on Tax Strategy)
The legal and tax landscape in which South African trusts operate has changed substantially over the last few months, thanks to changes to the Trust Property Control Act (“Trust Act”) and the Financial Intelligence Centre Act (“FICA”) by the General Laws (Anti Money-Laundering and Combating Terrorism Financing) Amendment Act, as well as new rules and requirements from SARS.
These changes impose new duties on trustees, and apply to all trustees, not only independent trustees.
1. Disclosure to Accountable Institutions you engage with, and record-keeping
Changes to the Trust Act impose two specific new requirements on trusts to combat money laundering and crime-financed terrorism, and failure to comply is an offence. If convicted, trustees face a fine of up to R10 million, or imprisonment for a period of up to five years, or both. These requirements became effective on 1 April 2023, leaving most trustees already non-compliant.
The first new requirement is that a trustee must disclose to any “accountable institution” (see here for the full list of what comprises an accountable institution, but the definition includes banks, attorneys, estate agents, long term insurers and brokers, trust companies and the like) that he/she engages with it in his/her capacity as a trustee, and that the relevant transaction or business relationship relates to trust property. The trustee must also record the details of the accountable institution the trust is engaging with.
2. Compiling and registering beneficial ownership
The second requirement imposed by the changes to the Trust Act is to establish and record the beneficial ownership information of a trust; to keep an up-to-date record of this information; and to lodge a register of the beneficial ownership information prescribed with the Master of the High Court.
This second requirement recently doubled, as SARS issued notice that trusts will now also be required to submit beneficial ownership details when completing a trust tax return, among a number of other tax changes affecting trusts, as discussed below.
3. Filing third-party returns – the IT3(t)
A further onerous obligation was imposed by SARS:
Most trusts are now also required to file third-party returns, in the same way banks report interest income and medical aids report medical aid tax information to SARS, which it uses to, for example, pre-populate tax returns.
While trust distributions were not previously reported to SARS by third parties, the new requirements oblige trusts to file third-party returns to SARS to declare distributions and vesting amounts to beneficiaries.
This must be done via an IT3(t) report which contains prescribed information relating to trust distributions and their beneficiaries and requires trusts to report on demographic information of the trust, demographic information of trust persons/beneficiaries, trust financial flows, and any amounts vested in a beneficiary, including net income, capital gains and capital amounts.
The ITR3(t) must be submitted by 31 May of each year. The first submission will be for the 2024 year of assessment, with the first ITR3(t) due by 31 May 2024. This is the same as the due date for IT3(b) and IT3(c) returns for trusts, which report interest, dividends, and capital gains or losses to SARS, and will certainly present practical difficulties in meeting the deadlines.
4. Completing more probing trust tax returns
With the trust filing season now open, SARS has also reminded trustees that ALL trusts are required to register for income tax purposes and that the representative taxpayer – most often the trustee/s – must submit a trust return.
SARS also recently introduced changes to the Income Tax Return for Trusts (ITR12T) with additional questions, and more mandatory supporting documents.
As mentioned, SARS has added a Beneficial Ownership Declaration page to the trust return to record all beneficial owners, and has indicated this information will be reconciled with the information reported to the Master’s Office to identify any discrepancies.
The changes also include additional questions to determine if any local or foreign amount(s) were vested in the trust as a beneficiary of another trust, or deemed to have accrued; and the number of trusts from where these amounts were received.
In addition, beneficiaries and donors (where deeming provisions apply) of a trust must declare their income that was vested in a beneficiary by the trust during the year of assessment in their income tax returns.
A range of mandatory and supporting documents must be submitted with the ITR12T. Depending on the trust type, this includes the Trust Deed and Letters of Authority, details of the ‘Main’ Trustee who is the registered representative to SARS; Annual Financial Statements, confirmation of banking details, and resolutions/minutes of trustee meetings that document significant decisions and actions taken by the trustees.
5. Registering as an “accountable institution”
Due to amendments to FICA, trustees, trust accountants and trust administrators may – in certain instances – have to register as “accountable institutions” with the Financial Intelligence Centre (FIC). See the link and comments in paragraph 1 above for the full definition of “accountable institution” but, if in any doubt, be sure to confirm with your accountant whether you need to register as an “accountable institution” in terms of the new rules, and to obtain assistance in doing so where required.
Professional assistance strongly recommended
Given all these new laws and requirements, the complexity of the processes necessary to comply, the impossible deadlines – some of which have already passed – and the hefty penalties involved, if you are a trustee you should urgently seek assistance from your accountant to ensure you can successfully navigate this new trust landscape.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.