Trusts are under the magnifying glass because of risks identified by the Financial Intelligence Centre (FIC) and the international money laundering and terrorist financing watchdog, the Financial Action Tax Force (FATF).
The FATF warned in 2019 that South Africa should establish better mechanisms to collect beneficial ownership information in trusts and companies. The country is now scrambling to put proper legislation in place to prevent it from being grey-listed by the watchdog.
This means the regulatory landscape for trusts in South Africa will change rapidly.
Real-time reporting
The South African Revenue Service (Sars) is also turning up the heat on trusts that are not registered for tax purposes or have not filed tax returns in years. It is now pushing for trustees to become third-party data providers and to submit trust data on a real-time basis from 2024.
In a report by the FIC in March, it was stated that the amount of cash as part of the money invested in and held by trusts is potentially very high. This increases the money laundering and terrorist financing risk profile of trusts.
Phia van der Spuy, founder of digital trust management platform Trusteeze, says about 950 000 trusts are registered with the Master of the High Court.
However, only 600 000 are registered for tax purposes. The compliance rate for the submission of tax returns is as low as 20%, she says.
It is estimated that the gap between distributions made by trusts and the amounts declared by the beneficiaries in their tax returns is close to R60 billion. “This is low-hanging fruit for Sars,” says Van der Spuy.
Sars now wants trustees to report on all distributions made to beneficiaries in a tax year, the balance on loans made to the trust and from the trust, and all the expenses incurred on free-use assets.
This will require detailed financial statements. There are many problematic trusts that have not done anything for the past 20 years, says Van der Spuy.
Abuse of trusts
Karen Eckley, managing director of Trustees for the Future, says the main purpose of a trust is to protect and benefit vulnerable beneficiaries, and therefore she has no issue with real-time reporting by trustees.
She believes the reasons behind the latest drive to properly regulate trusts, trustees and beneficiaries are the lack of legislation in terms of the contents of trusts and the powers and duties of trustees. Many trust service providers lack proper training and don’t fully understand the “nature of this beast”.
“People must draft the trust deed with insight and understand what is required to ensure that it is a legally founded entity. Then it is the best thing ever. However, human nature and most probably greed abused the instrument beyond its nature,” she says.
“A trust is like a woman. You can abuse her for a very long time and then suddenly one day it is the end of the abuse and you. Trusts have been very patient instruments for a long time, but it has had its fill of the abuse.”
Warm bodies behind the trust
Tarina Jardim, trust officer at BDO Wealth Advisers, agrees and adds that few people understand the Trust Property Control Act. Trustees do not prepare financial statements, they don’t submit tax returns, and there is no governance compliance in terms of the requirements set out in the act.
The FATF has announced specific rules around beneficial ownership. Sars has increasingly requested updated information with respect to the parties related to the trust, specifically who the beneficial and non-beneficial owners are, says Jardim.
Sars, the Master’s offices and financial institutions insist on the identity documents, proof of residence and tax reference number of the parties related to trusts. Even existing trusts that have never submitted these documents, are now being requested to do so.
“It will come to a stage where trustees will no longer be able to transact or operate their trusts until there is full disclosure of the warm bodies behind the trust,” warns Jardim.
Getting the trust house in order
Eckley advises trustees who have neglected their trusts to make use of the Sars Voluntary Disclosure Programme. They should also:
- Prepare detailed financial statements;
- File each and every outstanding tax return;
- Ensure that trust assets are kept identifiably separate; and
- Obtain a second opinion on the content and provisions of the trust deed.
“A trust is a luxury vehicle; service it regularly,” she says.
Jardim says the validity of the trust will be questioned when it is not compliant. If a trust is not valid, the trustees can be held personally liable for any taxes related to the trust activities, she adds.
Trust experts emphasise the need for an independent trustee who is a “total stranger”. The independent trustee is the ringmaster in the circus.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The information in this article does not constitute legal or financial advice.
