The SA grey-listing’s first fatality? South African family Trusts

In an ultimately futile attempt to avoid the grey listing of South Africa by the Financial Action Task Force (see our previous newsletter), the SA Revenue Service (“SARS”) is cracking down on South African trusts, and bringing in major compliance and reporting requirements.  This is clearly an effort to lock the door when the horse is already half-way down the road, to show willingness to combat terrorism and money laundering through the use of South African Trusts.  The words mosquito and sledgehammer come to mind, as well as, perhaps more appositely, the focus on the splinter in your brother’s eye, but ignoring the log in your own.

The onus for all this extra reporting falls on the trustees and failure to comply will be a criminal offence punishable by up to five years’ imprisonment or a R10 million fine.  This is a big deal and is going to drastically change the SA trust landscape, in our view without much benefit, given the lack of nefariousness in SA trusts anyway.

So what are the changes?  Firstly, there is brand-new definition of “beneficial owner” which includes the founder of the trust, all trustees of the trust, as well as all beneficiaries mentioned by name in the trust instrument.  If any of these happens to be a legal person e.g. a company, then the trustee is also required to establish and record who the natural person or persons are who effectively control or own that company.   This is a big deal!

While previously there were no reporting obligation on trustees pertaining to the trust’s beneficial owners, imagine the increased burden created on trustees if a beneficial owner is a company which is part of a group of companies. Some effort will have to go into the question of who controls this group. And imagine the further intensified compliance required when the natural person behind it all needs to be named and reported if, heaven forbid, a listed company falls under the definition of “beneficial owner”.   Secondly, trustees will have to report all distributions made to beneficiaries, and any other financial transactions including donations, loans.

Thirdly, trustees are now going to have to complete third-party declarations.  As we all know from painful experience, SARS currently and cleverly requires third-party declarations of taxpayer activity from banks, financial institutions, medical schemes, attorneys, and estate agents, ensuring that relevant information from those bodies is pre-populated on the taxpayer’s annual income tax return. This process is now being extended to trustees of SA trusts, so they will have to fill out the third-party declarations too.

But wait, there is more… SARS even wants an organogram to be uploaded where the trust has more than 10 individuals (natural persons) as beneficial owners.

What happens with this information? Well who knows really, but the amended law states that the trustee will have to hold a register of all the beneficial owners of all the trusts that she looks after, and further, the trustee will have to report this into an online facility at the Master of the High Court, effective from 1 April this year.

All these new reporting obligations will place a huge additional administrative burden on the representative taxpayer of the trust (i.e. the main trustee) and will have significant cost implications.

A lot of small family trusts may not have the financial means to develop the systems or employ tax practitioners to enable this kind of data submission. The cost of running a South African family Trust for very valid reasons like succession planning, may be too high to manage. And that hefty penalty would be enough to drive many families to dissolve their trusts, take the hit on the tax on distribution of the assets from the trust, and make a different plan for succession.

This is going to close down a lot of SA trusts as the cost and complexity related to the increased compliance, which in our view is not merited given the valid reasons for using SA trusts, is going to make trusts unaffordable for many.  Again, the middle-class lose out most.

If you want to discuss how these changes could impact you, contact us today.