The affairs of trusts have recently come under greater scrutiny by regulators, as they are often seen as conduits for money laundering, terrorism financing, and tax evasion. South African Revenue Service (Sars) discovered a R58 billion gap between distributions and income declared for the 2015 tax year. This has led to amendments to the Trust Property Control Act and new Sars reporting requirements to ensure transparency and compliance, as well as to adhere to the Financial Action Task Force (FATF) recommendations.
- Trusts have come under increased regulatory scrutiny due to their potential use for money laundering, terrorism financing, and tax evasion, leading to amendments in the Trust Property Control Act and new reporting requirements from the South African Revenue Service (Sars).
- Starting from September, trustees will face new reporting obligations, such as submitting demographic details for trustees and beneficiaries, details of the submitting person or entity, and information on distributions to beneficiaries and other financial flows.
- The heightened compliance measures and increased transparency requirements may result in a significant burden on existing trusts and make smaller trusts less feasible, as the costs of trust administration could potentially outweigh the benefits for beneficiaries.
New Reporting Obligations for Trustees
Phia van der Spuy, founder of Trusteeze, highlights the introduction of the IT 3(t) reporting obligation to Sars as a major change in trust administration. Starting from September, trustees must submit demographic details for trustees and beneficiaries, details of the submitting person or entity, and information on distributions to beneficiaries and other financial flows, such as donations and contributions.
Increased Transparency in Trust Administration
Another significant change is the obligation for trustees to notify the Master of the High Court about the beneficial ownership of trust assets and the names of all beneficiaries. Van der Spuy emphasizes the importance of trustees ensuring that all trust affairs are in order, as Sars has increased its enforcement efforts due to the high level of non-compliance regarding tax returns, registration, and tax payments.
Closing the Compliance Gap
South Africa has 900,000 trusts, but only 600,000 are registered as taxpayers, notes Van der Spuy. Compliance in terms of trust registration with Sars and tax return submission is around 12% and 14% respectively, with the number of valid and compliant trusts ranging between 5% and 9%. The remaining trusts are either invalid or non-compliant.
Challenges for Tax Practitioners and Trusts
Tax practitioners often encounter “sloppy financial statements” that make it difficult to submit accurate tax returns. Van der Spuy advises practitioners to carefully examine statements before proceeding with the tax return. Tarryn Atkinson, deputy chair of the South African Institute of Chartered Accountants’ national tax committee, highlights the significant burden on existing trusts to collect, store, and maintain the necessary information for compliance.
The Future of Trust Administration
Atkinson believes that smaller trusts may no longer be feasible due to the increased costs of trust administration, potentially negating the benefits for beneficiaries. Sars is also moving towards more frequent reporting obligations for employers and bi-annual reporting for public benefit organizations (PBOs). As the regulatory environment around trusts tightens, trust administration is set to become more transparent and compliant, signaling the end of “sloppy” practices.