The South African Revenue Service (SARS) presented a webinar on 29 July 2021 called Trust and Tax obligations, wherein they made it clear that there is a great focus on trust tax compliance. With approximately only 11% of trusts being tax compliant in South Africa, SARS will have a field day with the implementation of their nine strategic objectives, leaving trusts at great risk due to non-compliance. This may in turn lead to trustees being held personally liable by beneficiaries for not fulfilling their fiduciary obligations. Section 1 of the Income Tax Act defines a trust as “any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person.” This definition was inserted following the decision in CIR v Friedman case of 1993, in which it was held that under common law a trust is not a “person”. A fiduciary duty is an onerous, legal obligation (a duty of loyalty and care), of a person managing property or money belonging to another person, to act in the best interests of such a person. The following strategic objectives were discussed, which trustees should take to heart and get their affairs in order (as a matter of urgency) to avoid surprise attacks from SARS, which may costs trusts – and potentially trustees – dearly, financially.
Objective 1 – Clarity and certainty
SARS will attempt to provide clarity and certainty for taxpayers, including trustees. They will have little excuse to make incorrect declarations to SARS. SARS will provide guides, clarity notes, interpretation notes, and guidance on their website. Trustees and their advisors will have to stay abreast of these guidelines.
Objective 2 – Make it easy to comply with obligations
SARS will address current challenges that hinder compliance, such as registration of trusts as taxpayers with SARS. SARS is working on an automatic interface with the Master of the High Court to enable automatic registration of a trust as taxpayer with SARS upon registration of a trust with the Master, similar to a company’s automatic registration as taxpayer upon its registration with CIPC (the Companies and Intellectual Property Commission).
Objective 3 – Make non-compliance hard and costly
SARS recognises that many trusts are non-compliant. Such non-compliance includes issues around registration as taxpayers, submission of returns and payment of taxes. SARS encourages voluntary compliance of taxpayers in line with their voluntary compliance programme. SARS warns that in the event that someone is not doing the right thing and uses SARS’s services correctly, SARS will get to a point where they will be able to identify those who are not complying. SARS will use every aspect available to them to enforce the law. It was emphasised that SARS’s journey is to collect taxes due to it. This is a great warning signal to trustees to pro-actively get their affairs in order, before SARS knocks on their door with their relevant intelligence and information at hand.
Objective 4 – Strong workforce
SARS is on a drive to develop a high performing, diverse, agile, engaged and involved workforce. It is important for the employees of SARS to understand the intricacies of trusts and how their tax obligations are determined. SARS is recruiting the correct calibre of employee and are training relevant staff to develop expertise to audit trusts and to provide advice in the service centres. SARS is on a drive to empower employees to properly deal with trusts.
Objective 5 – Expand use of data
SARS is gearing up to use data within their comprehensive knowledge management framework. This will ensure integrity, insight and improved outcomes. SARS has over the years built strong networks and integration of data points, which will assist them to have access to all relevant information, without reliance on trustees to disclose it to them. They will interface with the Master of the High Court, financial institutions and other entities to collect data. SARS will be in a position to ensure that income that flows through a trust will be taxed in the hands of the person who is the ultimate beneficiary, through the proper use of data. The days are gone where distributions made to beneficiaries, that are taxable in their hands, can slip through the cracks. The proper application of the attribution rules related to trusts will also have to be applied, which tax the donors and funders, rather than the trust or its beneficiaries.
Objective 6 – Modernise systems
SARS strives to provide digital and streamlined online services, also for trusts. They acknowledge that they can improve their online services, such as changing of banking details. This should go a long way to assist trustees to remain compliant.
Objective 8 – Work with stakeholders
SARS is working with its stakeholders to improve their system, including with the Master of the High Court, the Department of Justice, tax practitioners and those who are responsible for administration of trusts. SARS wants to supply a system that ensures proper compliance that is easy to use.
Objective 9 – Build public trust and confidence in tax administration system
SARS acknowledges that trust is an important aspect to ensure it will become a smart and modern SARS that acts with unquestionable integrity and that is trusted and admired.
Trustees should understand these strategic objectives of SARS and get all the trust affairs in order and compliant with our law. A trust can no longer be treated similar to a will – that goes into some ‘bottom draw’. No longer can trusts be used solely as tax planning vehicles. Even if an estate planner is using a trust to protect their assets, it still has to be properly maintained, including the timely and proper submission of tax returns.
Special thanks to Phia van der Spuy for allowing us to share the article