Understanding trust taxation: Important considerations for trustees

The taxation of trusts has become a focal point for the South African Revenue Service (SARS) in recent years, with dormant trusts coming under increased scrutiny.

Trustees often overlook the fact that trusts fall within the definition of a "person" according to the Income Tax Act, necessitating the registration of all trusts for income tax. Failure to comply with these regulations can result in severe penalties, potentially holding trustees personally liable.

Stacy Rouchos, Managing Director of Bannister Trust (Pty) Ltd, a partner company of tax specialist firm Hobbs Sinclair, highlights the need for trustee awareness and proactive action, stating, "Trustees must recognise that even dormant trusts, those with minimal activity focused on holding assets or investments, are not exempt from tax registration requirements.”

Section 25B of the Income Tax Act outlines the taxation of trusts, stipulating that taxable income earned by a trust is subject to taxation within the trust unless the trustees choose to vest the income in beneficiaries. Income vested in beneficiaries is then taxed at the respective individual income tax rate. When registering for tax, trustees are required to submit the Letter of Authority, the Trust Deed and supporting documents for trustees, along with the nominated Tax Representative, to SARS. “Trusts need to be registered promptly after receiving the Letter of Authority from the Master of the High Court,” emphasises Rouchos.

Morné Janse van Rensburg, Managing Director at Hobbs Sinclair Advisory heeds the heightened focus on trust compliance by SARS and advises, "The increase in data requirements within income tax returns and the rise in verification and audit requests, demonstrate SARS' intensified scrutiny of trusts. Proper disclosure of income and expenses is imperative to avoid penalties."

“Trust beneficiaries are also accountable for accurate reporting,” adds Van Rensburg. “Taxable income vested in beneficiaries by trusts during the assessment year must align with information submitted in trust income tax returns and annual IT3(t) forms provided to SARS. Non-compliance with these obligations may result in substantial penalties as SARS tightens its stance on adherence.”

The complex landscape of trust taxation emphasises the importance of trustees collaborating closely with qualified professionals. "Proactive management of a trust's tax affairs, coupled with expert guidance from tax practitioners are paramount to ensure comprehensive compliance," underscores Rouchos.