Trusts are often established for the purpose of holding assets with no intention of trading. The assets held by the trust could be shares or property that do not generate income that would be subject to income tax. Sometimes this leads to trustees misunderstanding their tax compliance obligations.
Every year the South African Revenue Service (SARS) issues a notice in terms of Section 25 of the Tax Administration Act, 2011 advising taxpayers who can voluntarily submit a tax return and who must submit a tax return. Trusts that were resident during the year of assessment are found under the heading of persons who must submit a tax return. Submitting a tax return for a resident trust is not contingent upon the trust earning income during that year. If no income is earned a nil return must be submitted. A person who wilfully or negligently fails to submit a return to SARS is guilty of an offence.
It follows that if every resident trust is obliged to submit a tax return each year it is also required to be registered for income tax. One of the first acts of any trustee should therefore be to register their trust with SARS for income tax. SARS has very recently launched an online functionality for the registration of trusts for income tax via their SARS Online Query System on its website. This system aims to simplify the registration process and allows trustees to upload their documents online.
Aside from getting the basics right on tax registration and submitting returns, trustees should be opening a separate trust bank account into which all monies are deposited and keeping proper financial records of all transactions. These records will enable the trustees to accurately submit their tax returns.
There are several taxation rules that are unique to trusts and appropriate professional advice should be sought when required. For example, there is the “conduit” rule where income and capital gains received by the trustees and distributed to the beneficiaries in the same year is not taxed in the trust but in the hands of the beneficiaries. There is also the “deemed income” rule where income resulting from any donation or disposition to the trust is taxed in the hands of the person making the donation or disposition. More recently we have seen section 7C which triggers donations tax on low-interest or interest-free loans by connected persons to the trust.
There are many advantages in having a trust, but these will very quickly evaporate if trustees don’t get the tax compliance right.
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