SARS closes in on trusts’ exploitation of system
22 October 2014
Posted by: Author: Amanda Visser
Author: Amanda Visser (BDlive)
The misuse of trusts to hide income to evade or avoid paying taxes has long been a thorn in the side of the Treasury and the South African Revenue Service (SARS).
Economic Freedom Fighters leader Julius Malema’s Ratanang Family Trust, for example, was investigated for allegedly being a smokescreen for hiding assets and avoiding taxes.
The introduction of a far more comprehensive tax return for trusts will go a long way to eradicating most shenanigans by those wanting to exploit the system, say tax practitioners and industry bodies.
Institute of Professional Accountants tax committee chairman Ettiene Retief says the new return is designed to provide SARS with much more detail about the role players and greater disclosure of the activities of trusts. "The new form promises to revolutionise the way in which trusts are administered and used in tax planning."
Trusts have been given a bad name by a handful of people who use them solely to avoid or postpone their tax obligations.
Mr Malema had avoided paying taxes for many years, and an investigation by SARS showed that he owed taxes, penalties and interest of close to R18m. When cornered by SARS about monies deposited into his bank account and that of the family trust, Mr Malema said that they were donations from "anonymous donors".
When it became clear that it was quite easy to establish who the donors were, the payments became "distributions of earnings" and "exempt dividends" — presumably to protect the donors from being pursued for outstanding donations tax and income tax.
SARS now requires the details of parties benefiting from a trust in "any way". This must include identification and demographic information of the beneficiaries. It says that disclosure of all distributions to beneficiaries is mandatory immediately, while some of the newly required information disclosures will only be mandatory from the next tax year. The submission deadline for this year’s tax returns is January 30 next year.
BDO technical tax director David Warneke says the information required by SARS is similar to the details it expects from companies. The most significant change is the disclosure of the details of the beneficiaries of distributions.
"This is geared to see if the beneficiaries are taxed on their share of the income and if the trust is being taxed on the residual income, and whether the founder is taxed on some of the income," he says.
"I think it is right that Sars should be able to trace this through. It will certainly mean that the cost of doing returns will have to go up, because there will be a lot more work involved."
However, it is fair that people receiving distributions pay their fair share of tax.
South African Institute for Tax Professionals CEO Stiaan Klue says trusts can be a "complex and faceless animal". The design allows taxpayers to hide within a trust.
"We live in a society where people see how they can control legislation to their own benefit."
He says the comprehensive return expects more disclosure and ensures that essential information necessary for a correct tax assessment is not withheld from SARS.
KPMG senior manager in tax compliance Sebastine Griesel says the previous version of the tax return was a "one size fits all", whereas the new one will ensure proper disclosure.
"They even want to know the value of the right of use of assets that is being granted to beneficiaries, such as the beach house or game farm. There is certainly a higher burden on equitable disclosure," she says.
The Davis Tax Committee, appointed to review the tax system, is examining trusts and it seems likely that trusts will be taxed without allowing a flow-through principle in future, says Mr Warneke.
If a trust distributes income, the income is taxed in the hands of the beneficiaries at the rate of the taxpayer, which can be anything between 18% and the top marginal rate of 40%.
"There has been a suggestion that this principle will be watered down, where the trust will be taxed on the income at the trust rate of 40%, irrespective of whom the income is distributed to," Mr Warneke says.
This is similar to how companies are taxed. If the model is applied to trusts, then they will be taxed on its income before the distribution to beneficiaries and presumably the distribution will then be tax free in the hands of the beneficiaries.
The company tax rate is 28% and that of trusts is a flat 40% rate.
Mr Klue says the primary purpose of trusts is to manage the estate of its founders while they are still alive.
This article first appeared on bdlive.co.za