Trust Taxation Reform – Where Is This Heading?
16 August 2013
Posted by: Author: Johan van der Walt
Author: Johan van der Walt (CliffeDekkerHofmeyr)
High Net Worth Individuals (HNWI's) and trusts have been on the South African Revenue Service's (SARS's) radar for some time.
Reforming the manner in which South African (SA) trusts are to be taxed in future featured in both the 2012 and 2013 Budget speeches. In 2012 Minister Gordhan warned that a potentially significant number of HNWI's "...abused trusts to hide their tax liability." The 2013 Budget speech mentioned "... various measures [are] proposed to protect the tax base and limit the scope for tax leakage and avoidance." One such measure was that "... the taxation of trusts will come under review to control abuse." Chapter 3 (p54) of the 2013 Budget Review pointed out the type of abuse under scrutiny. There was not much detail though.
The Media Statement (4 July 2013) that accompanied the Draft Taxation Laws Amendment Bill and Tax Administration Laws Amendment Bill, 2013 mentioned that certain tax proposals requiring more consultation (eg trust reforms) would be dealt with later this year or as part of the 2014 legislative program. A recent Business Day report (5 August 2013) said that two meetings on the proposed trust tax reforms have taken place between Treasury and stakeholders. It was reported that the Treasury officials were "prepared to listen" to industry concerns but "...the proposed changes to the tax legislation governing trusts and foundations were definitely still under consideration."
There is increasing international co-operation between revenue authorities and they sometimes align their respective compliance initiatives. International developments could therefore shed some light on where the SA trust tax reform (and SARS's accompanying compliance activities) might be heading.
Trusts and how HNWI's use them are also being investigated by the Australian Tax Office (ATO). The ATO released its "Compliance in Focus 2013 - 2014" document on 15 July 2013. That document (p12) deals specifically with the "Misuse of trusts, including omitted income." The ATO makes the following observations:
- There has been significant growth in the use of trusts over recent years (700,000 trusts are currently registered in the Australian tax system) and there have been increased attempts to exploit legal boundaries to reduce tax payable;
- Most of the registered trusts are discretionary trusts used for a wide variety of business and investment activity;
- An emerging type of scheme involves trustees artificially reducing trust income in an attempt to direct tax liabilities to certain beneficiaries (who have little or no capacity to pay the debt); and
- A new Trusts Taskforce will focus on the above, including other tax avoidance and evasion schemes.
The Trusts Taskforce documentation on the ATO website indicates:
- The ATO's recent compliance operations have detected increased manipulation of trusts as vehicles at the centre of tax avoidance or evasion arrangements;
- The 2013-14 Federal Budget will provide $67.9m (ie R650m) over four years for the ATO to audit taxpayers involved in tax avoidance or evasion using trusts;
- The Taskforce's focus will be on people exploiting trusts to conceal information, mischaracterise transactions and artificially deal with trust income to avoid/reduce tax; and
- Tax scheme promoters, individuals and businesses who participate in such arrangements will also be targeted through eg the ATO's "intelligence systems, including new tax return labels."
According to the ATO the following will be "some of the factors that will attract our attention", ie arrangements where:
- Trusts or their beneficiaries (who have received substantial income) are not registered, or have not lodged tax returns or activity statements;
- There are offshore dealings involving secrecy jurisdictions;
- Agreements with no commercial basis appear to be in place so as to direct income entitlements to a low-tax beneficiary while the benefits are enjoyed by others;
- There is artificial characterisation of amounts, eg the tax outcomes do not reflect the economic substance resulting in some parties receiving substantial benefits from a trust while the tax liabilities corresponding to such benefit are attributed elsewhere;
- There has been mischaracterisation of revenue activities to achieve concessional CGT treatment – eg by using special purpose trusts to attempt to re-characterise mining or property development as discountable capital gains;
- Changes have been made to trust deeds to achieve a tax planning benefit, and are not credibly explainable for non-tax reasons;
- Transactions have excessively complex features or sham characteristics, e.g. round robin circulation of income among trusts; and
- New trust arrangements have materialised that involve taxpayers and/or promoters who have histories of, or connection to, previous non-compliance – eg people connected to liquidated entities that had unpaid tax debts.
The ATO expressly states that the Taskforce intends targeting higher risk taxpayers, but that its investigations would exclude ordinary trust arrangements and tax planning associated with genuine business or family dealings.
It is still 'early days' when it comes to the South African reform of the taxation of trusts. Nevertheless, local HNWI's should perhaps use the time at hand to get their (trust) ducks in a row – especially if developments down under are an indication of where SA might be heading?