The ever-evolving landscape of trusts

By: Kemp Munnik, Head of Structured Solutions: Bravura

Kemp Munnik

The use of trusts has been around for decades. Trusts have, however, received increased scrutiny from the South African Revenue Service (SARS) and the Financial Intelligence Centre (FIC). The increased scrutiny has left South Africans wondering whether a trust is still an effective tool in the toolkit when structuring their affairs. “It can seem daunting to understand the landscape, but having a professional in your corner will allow you to unpack the good, the bad and the ugly then it comes to making use of trusts from a South African perspective,” says Kemp Munnik, head of Structured Solutions: Bravura.

The good

The benefits of a trust (including  an offshore trust) are still plentiful, and include:

  • Protection of assets against potential creditors, lawsuits, and other legal claims
  • Safeguarding individual taxpayers from estate duty and estate-related costs (for example executor fees)  
  • Ensuring the continuity of underlying businesses
  • Portfolio diversification and mitigation of exposure to socio-economic, political and currency risks (where offshore trusts are considered)
  • Building a family legacy by preserving wealth for the next generation. 

After numerous queries, SARS has also confirmed that they will consider approving the release of funds from a South African trust to an offshore trust, provided that the necessary approvals are obtained. Similarly, a South African trust may also make distributions to non-resident individuals with the necessary approvals. The approval process may involve a manual application to SARS, or via e-Filing (where a Tax Compliance Status (TCS) pin will be required).

“The changes made by SARS are in line with the relaxed exchange control regulations that now allow for South African individuals and companies to create a loop structure whereby they are permitted to hold investments in South Africa via an offshore Trust,” explains Munnik. 

Where offshore trusts (with South African beneficiaries) hold (or wish to hold) investments in South Africa (through use of authorised offshore funds), an application to the South African Reserve Bank (SARB) is required to regularise the loop structure or place it on record. The relaxation of the exchange control rules, to facilitate and encourage inward investment into South Africa, has seen such applications getting approved where the rationale holds water and where the requirements are met (which include investment based on market value, the inward flow of foreign currency, and additional investment into South Africa). 

The bad

SARS increases scrutiny on trusts year-on-year, with this year’s tax filing season seeing additional questions being asked about whether a taxpayer is a beneficiary of a trust and whether distributions were received, as well as additional reporting requirements when requesting a TCS pin or when applying for a so-called “international approved transfer” to facilitate utilisation of the annual foreign investment allowances or apply for a change in South African tax residency status (whereby worldwide assets and liabilities need to be disclosed to SARS). 

Trust returns are also more onerous from July 2023, with questions around who the beneficial owner(s) of the trust are, their location, details on vesting from another SA or offshore trust, a compulsory requirement to prepare and submit annual financial statements and the resolutions of the Trust. “This will likely see the costs related to setting up and managing trusts increasing,” Munnik notes.

Furthermore, because of South Africa’s greylisting, the Financial Action Task Force (FATF; a global money laundering and terrorist financing watchdog) provided a list of 38 recommendations – almost all of them impacting trusts directly or indirectly. This is all to prevent the misuse of trusts and to curb money laundering and terror financing. 

Trustees are now expected to be able to identify money laundering, terrorist financing and tax evasion. An increased burden of record keeping has also been imposed on trustees whereby detailed records of beneficial owners of a trust and accountable instructions are to be submitted. These records need to be kept on file as well as lodged electronically with the Master of the High Court by the end of September 2023. 

The trustees will also have to make disclosures to SARS on all distributions that has been made to beneficiaries annually at the end of September 2023. 

The ugly

If trustees do not adhere to the obligations of disclosure to the Master of the High Court and SARS, the non-compliant trustees and beneficiaries of the trust will not be issued with a TCS pin to use their annual foreign investment allowances.  Trustees may also receive a fine of up to R10m or imprisonment for a period of up to five years (or both) for non-compliance and can be prohibited from acting as a trustee again. 

Where to from here?

From the above it is clear that there are still numerous benefits available, and you should still consider including a trust (whether local or offshore) when planning and structuring your affairs. It is, however, critical to ensure the proper set-up and ongoing management of such trust(s). 

The trust space (especially in relation to offshore trusts) is both opening up (with the exchange control regulations facilitating offshore investment and also re-investment in South Africa), and simultaneously clamping down (with the increased SARS scrutiny as well as obligations, fines and sanctions placed on Trustees). 

“While there is no reward without some risk, it’s really important to manage that risk and ensure overall compliance to properly enjoy the benefits that trusts can offer,” Munnik concludes.

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