Changing the rules on trusts
To anyone involved in a trust, It is now no secret that SARS has identified trusts as a targeted source for extra tax revenue. This is based on the fact that they were used as tax havens for taxpayers as trustees or beneficiaries. As they have become to know this, SARS has been introducing changing over the years to stop this. Not all planned changes have happened yet. Trusts cannot and should not be used to unfairly reduce tax bills. They should be used for what they were designed to for. an example is specific commercial reasons such as asset protection.
Why are trusts a target for SARS?
SARS has identified that trusts are not tax compliant. This is a cause for concern to SARS. Statistics show that there are more trusts registered than there are compliant trusts. SARS have also changed the trust tax form to make sure there is more disclosure. It is suspected that SARS will start charging penalties for outstanding returns. This may way copy the current monthly fee that companies are levied for not submitting returns. the end result is to get the trust’s tax compliant as soon as possible.
4 risks to be considered:
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Trust registration and commencement
The trust deed is the main document in the world of trusts. This means that a huge amount of time should be taken to make sure that it is drawn up properly. BC Accounting Services (BCAS) always advises it be drawn up with the assistance of someone knowledgeable in Trust law. It should NEVER be a copy and paste template exercise. The first thing the trustees do is to open a bank account to show proof of receipt of the initial amount to start the trust.
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Independent Trustee
The Master recently issued a rule requiring the compulsory appointment of an independent trustee on all new family trusts. This was because trusts were not being taken care of properly, either according to law, SARS or the trust deed. Having said that, the appointment of trustees MUST be taken seriously. They are NEVER just there to sign legal documents. They must be engaged in the process of the formation and have an oversight of the trust’s activities. This is why it is imperative that trustees appoint and contract a professional independent trustee who will take their responsibility seriously, and who is impartial. This can be a lawyer or attorney or accountant. It does not have to be a professional person though. eg: it may be a family member for a trust involving children who are minors. BCAS do suggest a professional person or company though
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Trust Administration
- This will include (but not limited to) the following:
- The custody of trust records
- Organising and recording of meetings of trustees
- Resolutions
- Correspondence with the Master’s Office
- Facilitation of financial recording
- Tax compliance processes etc.
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Financial records of a trust
Trusts do not require the financial statements to be audited or to adhere to any specific accounting format unless specified in the trust deed. Although getting it compiled by an accountant is advisable, they can be in a simple format. Having said this, Trusts do need to appropriate financial records, which also make tax compliance obligations easier to adhere to.
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Tax compliance
Much like other entities do, trusts earn income or not must submit the necessary returns in order to stay compliant with SARS. The main return is the annual trust tax return. This should be done as early in the year as possible to notify beneficiaries of any income distributed (if any) to them. This is critical to them because they have to declare this in their tax return in their personal capacity. All trusts have a February year-end and are thus aligned with the individual tax calendar.
Trust Tax Returns are explained more in this post
We now know trusts are going to be a key focus area for SARS. Anyone involved in trust should be engaged with their trust and make sure that all their risks are mitigated. As an added protection, BCAS can be the independent accounting officer and ensure that all the financial and tax compliance is nothing to worry you.