Following an analysis of the tax compliance of trusts and their beneficiaries, which found significant non-compliance, the South African Revenue Service (Sars) has created an interim online registration platform for trusts to register for tax purposes.
It has also threatened non-compliant trusts and beneficiaries with civil and criminal sanctions, the imposition of penalties and interest, and the raising of estimated assessments if any non-compliance is not remedied.
Joon Chong, partner at Webber Wentzel, says Sars is very concerned about the lack of trust registrations for tax purposes, the non-submission of tax returns by trusts, and significant differences between income from distributions declared in the tax returns of beneficiaries, and trust distributions declared in the trust tax returns.
Third party data
Various measures implemented by Sars will address these concerns, she says.
This includes obtaining third party data that will eventually be reported in auto-assessments of individuals who are beneficiaries, and potentially also be used to generate effective tax rates for employers to withhold employee tax on trust distributions from individuals who are employees.
Chong says third-party data will increasingly be used to pre-populate returns of individuals who are not auto-assessed.
Sars is in the process of auto-registering individuals who are not registered for personal income tax, but whose third party data shows they should be registered.
Elle-Sarah Rossato, head of tax controversy and dispute resolution at PwC, says there is a perception that trusts are non-compliant and used as a vehicle to house assets or abused from a tax avoidance perspective.
“Diverting assets to trusts could be for the purpose of making collection steps difficult for creditors, including making it difficult for Sars in its endeavours to collect taxes.”
She adds that all trusts (as entities, as well as the beneficiaries) must be registered taxpayers and file tax returns.
It is clear that Sars is zoning in on the overall compliance of trusts as well as beneficiaries.
PwC is aware that the registration process for trusts is often challenging and that the eFiling platform is not functioning optimally in this regard. This is frustrating for taxpayers who wish to be compliant but have difficulties as a result of the eFiling platform. However Rossato notes that, encouragingly, Sars is addressing this issue through a dedicated – albeit temporary – online query functionality.
In a statement, Sars says it has embarked on a journey to modernise and improve service offerings to trusts and their beneficiaries. These improvements aim to make it easy and simple for trusts to comply with their legal obligations.
Sars has also revamped the income tax return for trusts in line with the legislative amendments around Section 7 of the Income Tax Act, which targets assets that are donated by a tax-paying person to another person with the intention of avoiding tax on the profits derived from these assets, says Rossato.
Remedies for non-compliance
Trustees should ensure that management accounts are prepared regularly, and at the very least annual financial statements are prepared and finalised timeously after the end of the financial year.
“This will go a long way towards ensuring that trust and beneficiary tax returns are filed on time with accurate information in the returns on loans to and from the trusts, and distributions to beneficiaries by the trustees,” says Rossato.
Sars Commissioner Edward Kieswetter warns that Sars will invoke all measures provided for in legislation if trusts and their beneficiaries intentionally negate their legal obligations.
He advises non-compliant taxpayers to make use of the Voluntary Disclosure Programme (VDP) to regularise their tax affairs.
The VDP regime has six criteria which have to be met for an application to be accepted by Sars. One is that the application must be “voluntary” and another that the application must be “full and complete”, says Rossato.
“In theory, if there is no pending audit or criminal investigation, the application should be regarded as voluntary and accordingly accepted by Sars. The use of the VDP process is encouraged due to the fact that it, among others, shields a taxpayer from criminal prosecution.”
She advises trusts and beneficiaries who are not compliant to submit full and complete tax returns as expeditiously as possible.
Sars is using technology to look wider than just the tax return and is increasingly using data to detect under-declared taxes in the event of distributions made to beneficiaries, she adds.