The fact that SARS collects 90% of the governments’ revenue means they have to be on top of their game in terms of tax collection. In the 2017/2018 tax year, there was a tax revenue collections shortfall of R50 billion, which contributed to the increase in VAT of 15%. So what’s next? Graeme Saggers – Head of Tax at Nolands, says, ‘One of the areas the South African Revenue Service (SARS) is targeting is trusts. Currently, trusts only account for 1% of tax revenue, but we expect that to change as SARS changes the rules of the game while it gathers additional income for the National Development Plan.’
Bearing in mind that in 2017/2018, out 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 Tax Risk Underwriting Managers. ‘And it’s probably going to get worse. Economic growth is less than 1% versus SARS revenue growth needed of 6% per annum. In essence, SARS is being asked to perform more with less. 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 on taxpayers.’
Changing the rules
It is no secret that SARS have identified trusts as a targeted source for extra tax revenue. So much so that recent tax law amendments affecting trusts have put trusts in the spotlight, and caused many people to question its efficacy and value.
Saggers says, ‘The many income tax law amendments over the years have been designed to close loopholes, and to stop them from becoming an unfair tax haven. 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
More recently, SARS have identified, with the assistance of the Davis Tax Committee, that non-compliance of trusts is a cause for concern. Recent statistics show that there is a major disparity between the number of trusts registered with the Master of the High Court and the number of trusts that are compliant in their tax affairs with SARS. Over the years the Trust tax return forms have been adapted – each time in order to include more disclosure. What it really means is that SARS intends to, or has already begun evaluating all Trust transactions. Critically. It is surprising that SARS haven’t yet announced that administrative non-compliance penalties will be charged on trusts with outstanding returns. But they will. When these penalties are imposed it will result in a monthly ‘fine’ to trusts for all tax returns outstanding.’
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
- Technically a trust comes into existence when the trust deed is signed, and the original donation is made.
- In terms of the Trust Property Control Act however, the trustees do not have authority to act on behalf of the trust until such time as Letters of Authority are issued by the Master’s Office of the regional High Court.
- 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.
2) 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 and deeming it to be an ‘alter ego’ trust.
- In an alter ego trust, the courts will look through the trust and hold the trustees personally liable for any liabilities (including tax consequences).
- This occurs in situations where a person who is not a trustee enforces control over the trust assets. This is a significant risk when all trustees are related and are also beneficiaries of the trust.
- Previously it was only a recommendation that an independent trustee be appointed to ensure that ownership of the assets is separated from their control. Recently, however, the Master 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. ’
- It is common for trusts to be created to hold a specific passive asset (e.g. shares in a private company). Unfortunately, the administration of these assets is often neglected and forgotten. Trusts should be actively administered so that none of the fiduciary responsibilities like trust financial statements, AGM, trustee resolutions are neglected
- It is best practice to appoint a trust administration company to take control of the administration of the trust, which entails such responsibilities as custody of trust records, organising and recording of meetings of trustees and resolutions, correspondence with the Master’s Office, facilitation of financial recording and tax compliance processes etc.
4) Financial records
- There is no statutory requirement for trusts to prepare annual financial statements. However the trustees must, in terms of the Trust Property Control Act, keep adequate financial records.
- The most appropriate method of doing so is to appoint an accountant to prepare annual financial statements, even if they are very simple.
- 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, they do need to appropriate financial records which also make tax compliance obligations easier to adhere to.
5) Tax compliance
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:
|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.|
|01 July||Trust season opens||Trust tax returns can be filed. It is recommended to do the trust tax returns as earlier 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|
Trusts are going to be a key focus area for SARS in the foreseeable future. Anyone who is connected to a trust should therefore engage with their trust administrator to ensure that all their risks are mitigated.
Lombaard concludes, ‘As added protection, it is highly recommended that trusts buy tax risk insurance, as this will assist in the costs of disputing any unfair adverse findings from SARS. Tax risk insurance will appoint and pay for a team of top tax professionals to deal with the matter.’