The role of Independent Trustees
Over the past few years, SARS has raised the issue that the trusts are not administered independently by the trustees. An independent trustee is required to act on all family trusts to ensure that the decisions made are objectively reviewed and approved, that the trustees act within their powers contained in the trust deed and that the trust assets are administered for the benefit of the beneficiaries. The independent trustee, together with its co-trustees, must ensure that all decisions taken are properly recorded in minutes and resolutions after having a meeting.
When making distributions from the trust to the beneficiaries via the conduit principle, the trustees must ensure that the distributions are properly recorded via resolutions within the specified year. The beneficiaries receiving the income must be registered with SARS and must ensure that they declare their income tax to SARS. If the distributions are not properly recorded, SARS may raise questions which may lead to penalties.
Loan accounts and Section 7C implications
When a trust is established, loans are often made to transfer assets, such as properties, into a trust. For example, the trusts want to purchase a property, but the trust does not have the necessary funding. The trustees can then loan money to the trust to purchase the property. When lending money to the trust, it is important to note that section 7C of the Income Tax Act 58 of 1962 may be triggered if the loan is interest-free or the interest is below the prescribed interest rate. This may cause potential problems since it will be seen as a deemed donation. What will happen is that the difference between the official interest rate and the interest rate charged on the loan between the trustee and the trust will be seen as a donation and taxed. It is, therefore, crucial to ensure that there is a written loan agreement in place in terms of which the correct interest rate is charged. The written loan agreement concluded between the trust and the trustee will assist with any queries that SARS may have in this regard.
To ensure that your trust complies with SARS, it is important to ensure that the beneficial ownership register indicating who the warm bodies of the trust are is kept up to date by the trustees and should any changes be made to the beneficial owners of the trust, that these changes are recorded on the beneficial ownership register and submitted to the Master of the High Court as soon as possible. The updated beneficial ownership register must accompany the SARS tax return to avoid any red flags being raised.
SARS registration and tax obligations
The trustees must ensure that a Family Trust, whether active or dormant, are registered with SARS for income tax purposes. The Family Trust will be registered as a taxpayer with SARS. Once the trust is registered with SARS for income tax, the trust will receive an active tax reference number. It is important to note that a Family Trust must file its annual tax returns during the tax filing periods. This applies to all trusts, even if it is a dormant trust. If a trust only holds shares in a company, this trust will qualify as a dormant trust and must file its zero tax returns with SARS.
Trustees must ensure that the trust has properly maintained financial statements to accompany the trust documentation. Filing trust tax returns on an annual basis requires up-to-date financial statements, resolutions for distributions, minutes of the trustee meetings where the financial statements were approved and decisions made by the trustees are noted, the trust deed or amended trust deed, the latest Letter of Authority, and the beneficial ownership register.
SARS compliance and the role of AI
Another requirement to ensure the trust is SARS compliant is that a trust must submit the ITR12T income tax returns on an annual basis. This cannot be skipped. It has become extremely difficult to conceal trust non-compliance since the integration of artificial intelligence (“AI”) into SARS’s compliance systems. The system is designed to analyse enormous volumes of data, making it easy for SARS to detect irregularities and tax gaps. The enhanced AI system allows SARS to cross-reference information with the Master of the High Court, which enables easy identification of non-compliance and discrepancies.
Family Trusts will remain a useful tool for wealth planning in South Africa; however, it is extremely important to ensure that the trust fully complies with all regulatory and legislative requirements, including any changes implemented by SARS. Trustees have a fiduciary duty to ensure that the trust is administered correctly in accordance with the trust deed and that the trust complies with SARS requirements. If you are unsure whether your trust is, in fact, correctly managed and compliant, it may be a good idea to consult a specialist to ensure the trust is free of any sanctions or penalties.
Disclaimer: This article is the personal opinion/view of the author(s) and does not necessarily present the views of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever, and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken based on this content without further written confirmation by the author(s).
