South Africa | New reporting requirements for trusts

• New rules in South Africa require trusts to disclose beneficial ownership of assets, effective from 1 April 2023.
  
  
• The new rules effectively make trustees third-party providers of data for the South African Revenue Service.
  
  
• Penalties for noncompliance are high and onerous, so assistance should be sought to help ensure compliance.
   

Beneficial-ownership disclosures required

South Africa introduced new rules, effective from 1 April 2023, on requirements to disclose the beneficial ownership of assets. These measures were introduced in a new section (11A) (pdf) in the Trust Property Control Act (TPCA) read with the Regulations.

The aim of the new rules is to improve transparency regarding the ownership of trust assets before assets and income vest in beneficiaries and the liability to report falls on the trustee.

Section 11A(1) of the TPCA states that a trustee must:

1. Establish and record the beneficial ownership of the trust
   
   
2. Keep a record of the prescribed information relating to the beneficial owners of the trust
   
   
3. Lodge with the Master's Office a register of the prescribed information on the beneficial owners of the trust
   
   
4. Ensure that the above information is kept up to date

If any of the parties is a juristic person (i.e., an entity, such as a corporation, that is recognized as having legal personality, subject to legal rights and duties), then the person who represents that juristic person is included in the definition.

Information required from the beneficial owners includes full name, date of birth, nationality, official identity document number or passport number, citizenship, residential address, address for receiving notices, other means of contact, tax number, class or category of beneficial ownership, date on which the person became a beneficial owner, and date on which the person ceased to be a beneficial owner.

Beneficial owners include founders, people who exercise effective control over the administration of the trust, vested beneficiaries, all trustees and each beneficiary named in the trust. The definition of a beneficial owner is broad and special caution needs to be taken with discretionary beneficiaries. If a discretionary beneficiary has ever received a distribution or is named as a beneficiary, the new rules appear to apply to them — but if they are not specifically named and have not received any distributions, it is still unclear whether the new rules would apply, so extreme care must be taken. Penalties for noncompliance are high and onerous, so assistance should be sought to help ensure compliance.

The Regulations restrict access to the disclosed information to various government bodies, including the National Prosecuting Authority, the Financial Intelligence Centre and the South African Revenue Service (SARS).

A trustee who fails to comply with the obligations outlined in the Regulations could, upon conviction, be liable for a fine not exceeding R10m (i.e., 10m Rand) or imprisonment not exceeding five years, or both.

All of the above-outlined amendments to the Trust Property Control Act were included in the General Laws Amendment Act, Section 6, and published on 29 December 2022. The requirements to maintain details of the beneficial owners comes into effect 1 April 2023.

Trustees become third-party data providers to SARS

Notwithstanding that SARS can access the beneficial ownership information that must be disclosed under section 11A of the TPCA, SARS has implemented its own new requirements for reporting by trustees of resident trusts, having identified significant noncompliance in terms of trusts' registration, tax return submissions and disclosures. Similar reporting requirements will also apply in various ways to Public Benefit Organizations (effective March 2024) and employers, though this Alert focuses solely on trusts.

These new reporting requirements significantly increase the compliance and administrative burden on trustees, as they now become "third-party data providers" to SARS, similar to banks and insurance companies. Trustees will, effective September 2023, need to submit to SARS an IT3(t) form for each trust. Submission of the IT3(t) form is required in addition to the current Trust Return Process and will actually need to be completed before the annual Trust Income Tax Return is submitted (ITR12T). The IT3(t), will be due on the 30th of September of each year in which the trusts tax year ends.

The IT3(t) requires all the demographic details of the trustees and the beneficiaries (including ID number, passport number, address and contact details), details relating to all financial flows including loans, donations and distributions. This may create difficulties for trustees who must collect the required information and value distributions, which often is only done after completion of the financial statements. For example, a distribution of dividend income earned by the trust for a particular period may be accomplished before the trust's year-end — usually February — but the actual values will often only be determined once the financials are finalized at a later date. Further practical difficulties may include that the individual tax season usually opens on 1 July each year and, with the IT3(t) submissions due by 30 September, individual tax returns may need to be reopened and reassessed to account for the income vested in natural person beneficiaries.

Some confusion remains regarding whether SARS would expect a discretionary beneficiary who has never received any distributions to be declared as a beneficiary. This has been bought to SARS's attention by various tax advisors and we await clarity on the matter.

Trustees, as representative taxpayers for trusts, will be required to supply information electronically to SARS within seven months of the trust year-end regarding all distributions of the trust to beneficiaries or other persons during the preceding tax year of assessment that ended at the end of the trust tax year, which is usually February of the same year.

SARS's public notice published in Government Gazette no 41512, with effect from 1 March 2023, states the following:

• The trustees of a resident trust must submit an IT3(t) in respect of any amount vested in a beneficiary including income (net of expenditure) capital gains and capital amounts distributed by 30 September.
  
  
• If there are fewer than 20 records, the data must be submitted electronically using e-filing.
  
  
• 21-50,000 records, the data must be submitted electronically using the hypertext transfer protocol secure for bulk data filing on e-filing.
  
  
• More than 50,000 records, the data must be submitted electronically using the Connect Direct bulk data filing on e-filing.

SARS may agree to allow a person to submit a return for a different period or in a different manner on request.

SARS published a 272-page Business Requirement Specification (BRS) document on IT3 data submission (pdf) on 7 October 2022, which sets out the process and what must be reported on IT3(t) forms.

The BRS states that the IT3(t) must report:

• Demographic information of the reporting trust
  
  
• Demographic information of trust persons/beneficiaries
  
  
• Taxable amounts distributed to/vested in persons/beneficiaries
  
  
• Details of nontaxable income distributed
  
  
• All trust financial flows

SARS clearly seems intent on ensuring transparency between what is declared within or from South African trusts and on ensuring this data is pre-populated on the annual returns for natural persons.

Reporting requirements for trustees are becoming increasingly burdensome. Further, SARS will be closely monitoring whether trustees are complying with timing requirements, acquiring the correct information and submitting tax returns in the years ahead.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Advisory Services (Pty) Ltd., Johannesburg
 

• Emile F Du Toit
  
  
• De Waal van Blerk
  
  
• Mandy Warner
   

Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris
 

• Bruno Messerschmitt
  
  
• Alexis Popov
   

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
 

• Kwasi Owiredu
  
  
• Byron Thomas
   

Ernst & Young LLP (United States), Pan African Tax Desk, New York
 

• Brigitte Keirby-Smith
  
  
• Dele A. Olagun-Samuel

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.