Third-party reporting on trust distributions on its way


The South African Revenue Service (Sars) is moving towards an environment where all distributions and vesting amounts from trusts to beneficiaries must be reported to it on a real-time basis.

Currently Sars requires banks, financial institutions, medical aid schemes, attorneys and estate agents to file third-party returns once a year shortly after the end of the year of assessment. The plan is to extend this submission obligation to trusts.

Sars has been engaging with stakeholders, including representative bodies of tax practitioners, on the requirement for resident trusts to declare distributions through a new income tax return for trusts.

Piet Nel, independent tax consultant, says the move to include trust third-party submissions is mainly due to the fact that Sars is aware of differences between income declarations from beneficiaries and distribution information from trusts in their returns.

More pressure

He says this move will place considerable pressure on tax practitioners who generally have to prepare the financial statements of smaller family or investments trusts who do not have sophisticated financial management systems in place.

Nel says trustees will in future have to ensure that all decisions around the distribution of income or vesting amounts are made before year-end, and accurately captured in the minutes to prove that the distributions were done in the year of assessment.

He explains that trustees have to decide annually when and how they want to distribute income to beneficiaries or whether the amounts will remain within the trust. The decision triggers a tax event.

If the income is not distributed within the tax year it will be taxed in the hands of the trust at a tax rate of 45%. If it is distributed to the beneficiaries it will be taxed in their hands at their respective tax rates.

Read: Sars and the never ending cycle of inappropriate verifications

Monthly reporting

However, he has seen that Sars will tax the trust and raise an understatement penalty if there is insufficient proof that the income was distributed to the beneficiaries. The beneficiaries will then have to claim the tax that was deducted on their income from Sars.

Sars ideally wants monthly reporting on any amounts vested or distributed when there is activity, with a final report due at the end of February. What happens in practice is that tax practitioners only receive information after the end of the year of assessment.

Joon Chong, partner at Webber Wentzel, says there is usually a delay – sometimes years – between the time taxpayers file their income tax returns and the time Sars receive the trust data through the trust return.

“This means Sars does not usually have independent data for verifying the beneficiaries of trust income, capital or assets. Under these circumstances it is impossible to pre-populate these taxpayers’ auto-assessments with their distributions or amounts vested from trusts.”

Nel says the ideal situation for tax practitioners is to have sufficient time after year-end to prepare the financial statements and calculate the tax consequences based on the distribution decisions. This will ideally be around the end of May.

It will be a phased process to enable smaller trusts, their trustees, and their tax practitioners to put proper systems in place in order to meet new reporting requirements, he adds.

Read: Sars, you, and those auto-assessments

Modernisation journey

In an earlier statement Sars said 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.

Read: A look at how Sars is rebuilding itself

Sars commissioner Edward Kieswetter has warned that the revenue service will invoke all measures provided for in legislation if trusts and their beneficiaries intentionally negate their legal obligations.

Elle-Sarah Rossato, head of tax controversy and dispute resolution at PwC, says trustees should ensure that management accounts are prepared regularly and, at the very least, annual financial statements be 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 … on loans to and from the trusts, and distributions to beneficiaries by the trustees,” she said.

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