Trusts on the clock: Navigating the urgent IT3(t) reporting deadline

The IT3(t) reporting requirement, introduced by the South African Revenue Service (SARS), is a critical development in trust taxation. With the deadline of 30 September 2024 fast approaching, it is imperative for trustees to act swiftly. This requirement mandates that trusts submit detailed reports on financial flows and beneficiary distributions. This article will briefly provide an overview of the IT3(t) requirements and recap the general principles of trust taxation in South Africa.

Background and implementation

The IT3(t) reporting requirement was first published in the Government Gazette on 30 June 2023. While many uncertainties remain, the requirement aims to enhance transparency and compliance in trust taxation by ensuring that all financial transactions and distributions to beneficiaries are accurately reported.

Submission platforms

Trusts can submit their IT3(t) reports through various platforms depending on the size of the data. The following options are available, each with its limitations:

  • Connect Direct for bulk data submissions;
  • HTTPS for medium-sized data submissions;
  • eFiling for smaller submissions, specifically using the IT3-01 form for up to 20 certificates per submission period.

Although taxpayers are experiencing various technical submission challenges, SARS is actively addressing these issues.

Information to be disclosed

When the IT3(t) requirements were initially published, SARS implied that trustees only need to report distributions made to beneficiaries. Trustees were instructed to report any amount vested in a beneficiary, including income (net of expenses), capital gains, and capital amounts. The SARS website, however, further stipulates that the following amounts need to be included:

  • Amounts vested to beneficiaries of Trusts in a year of assessment (irrespective of whether the amount vested was paid or credited on loan account in favour of the beneficiary); or
  • Amounts vested to beneficiaries but where the amount is subject to a donation, settlement or other disposition and the donor is to be taxed on the amounts (irrespective of whether the amount vested was paid or credited on loan account in favour of the beneficiary).

Key reporting elements

The IT3(t) form includes several critical sections:

  • Total Expenses Incurred: this includes all expenses incurred by the trust during the reporting period;
  • Total Contributions to Trust: this covers all contributions made to the trust, distinct from donations;
  • Total Contributions Refunded by Trust: this includes repayments made by the trust;
  • Total Contributions Received from Trust: this details the amounts received by beneficiaries from the trust.

Role of accountants and tax practitioners

It is important to remember that a trust’s board of trustees remains ultimately responsible for the accuracy of these reports. Notwithstanding, many trustees are increasingly turning to their accountants and tax practitioners for guidance. These professionals play a crucial role in navigating the complex information required for the IT3(t) form, which can only be submitted once the trust financial statements are finalized.

Rationale behind the IT3(t) requirement

SARS introduced the IT3(t) requirement after identifying a significant gap between distributions reported by trusts and those reflected by beneficiaries on their tax returns, amounting to billions of rands. By requiring trustees to report distributions, SARS aims to close this gap and ensure accurate tax collection. This information will in future be used to pre-populate beneficiaries’ tax returns.

Tax treatment of trust income and capital gains

Even though many tax practitioners are struggling with the means of submission, the average tax practitioner does not have sufficient information to apply the attribution rules. Historically, income and capital gains could therefore have been distributed to beneficiaries without due application of the attribution rules.

The complexity of treating trust income and capital gains is often underestimated. Various trust role players may pay tax on income and capital gains generated in the trust rather than the trust itself. Strict rules must be followed to remain compliant with the law. A summary of the relevant provisions follows below:

  1. General provisions
    1. The default position under South African law is that a trust is not a juristic person. It does not have a separate legal personality and is instead an accumulation of rights and liabilities. However, certain legislation, such as the Income Tax Act 58 of 1962 (ITA), regards a trust as a juristic person for operational and efficiency reasons.
    2. Trusts that are resident in South Africa are taxed on their worldwide receipts and accruals, while non-resident trusts are taxed only on income from South African sources.
    3. Most trusts are taxed at a flat rate of 45%, with no personal rebate or exemptions available to them, unlike natural persons. However, trustees can claim deductions for which the trust qualifies under the ITA.
    4. Income derived from a trust can be assessed in the hands of the beneficiaries, the trust, or the donor, depending on the circumstances, as determined by section 25B and the deeming provisions in section 7 of the ITA. Income is taxed only once, either in the hands of the beneficiaries, donor, or trust.
  1. Section 25B
    1. Section 25B of the ITA is a deeming provision that regulates which income derived by a trust is taxable in the hands of which party. It functions subject to section 7 of the ITA and comes into operation only to the extent that section 7 does not already apply.
    2. If it is ascertained that a beneficiary has a vested right to the income, and the amount is derived for their benefit, the beneficiary is liable to pay tax on that amount, and the trust has no tax obligation in respect of the particular amount.
    3. If there is no ascertained beneficiary with a vested right to the income, the trust itself is taxed on the relevant income.
    4. Section 25B does not apply to capital gains, which are instead governed by the Eighth Schedule of the ITA. The conduit pipe principle embedded in section 25B allows income to flow through to beneficiaries without losing its character if it occurs in the same year of assessment.
  1. Section 7
    1. Section 7 of the ITA contains deeming provisions that attribute income to another taxpayer, even if it did not accrue to or was not received by that taxpayer. These provisions are anti-avoidance measures to prevent tax minimization through income splitting or other arrangements.
    2. Specific subsections of section 7 target different scenarios, such as preventing income splitting between parents and minor children (section 7(3)), preventing circumvention of anti-avoidance rules through third parties (section 7(4)), and addressing conditional income distributions (section 7(5)).
    3. Section 7(8) targets transactions where South African residents transfer income-producing assets to non-residents to reduce tax liability.
  1. Section 7C
    1. Section 7C was introduced to curb the tax-free transfer of wealth through interest-free or low-interest loans to trusts. It deems the foregone interest on such loans as a recurring donation, subject to donations tax.
    2. The provision applies to any interest-free or low-interest loan to a trust, whether made directly or indirectly, and also to loans made to companies where the trust or connected persons own a significant share.
    3. Section 7C(1B) addresses situations where preference shares with no or low returns are used to circumvent the provision, deeming the subscription price as a loan and dividends as interest.
  1. Capital gains
    1. While there are various provisions that deal with the taxation of income in the hands of the trust role players, as well as a range of anti-avoidance rules, the Eighth Schedule of the ITA contains similar provisions that regulate the receipt of capital in the trust relationship.
    2. The principle that a capital receipt must only be subjected to taxation once throughout the trust relationship remains applicable. Thus, a capital gain will either be taxed in the hands of the trust, beneficiaries, or donor.
    3. Paragraph 80 of the Eighth Schedule determines under what circumstances the capital gain or capital loss must be taxed in either the hands of the trust or the beneficiaries.
    4. The application of paragraph 80 is subject to the attribution rules contained in paragraphs 68, 69, and 71.
  1. Capital attribution rules
    1. The Eighth Schedule contains provisions that mirror section 7 for capital gains. These provisions deem capital gains to be that of the donor in certain circumstances, such as when assets are transferred to minor children or when donations are subject to conditions or revocation.

Compliance and reporting

Trustees must ensure proper systems are in place to manage the required information effectively. With SARS’ renewed focus on the compulsory application of the attribution rules, trustees and tax practitioners must communicate to ensure amounts are correctly reflected in the respective taxpayers’ various tax returns. Misreporting can lead to penalties and interest.

Voluntary disclosure

Trustees and taxpayers who have not previously reported attributed amounts on tax returns should be cautious, as they might face questions and penalties from SARS. One solution is the SARS Voluntary Disclosure Programme (VDP), which offers an opportunity for defaulting taxpayers to correct their tax issues.

Future developments

While SARS will not use this year’s IT3(t) submissions to prepopulate the relevant parties’ respective tax returns, it will use the information to verify the accuracy of submitted returns. They are also working on integrating the IT3(t) reporting with other compliance frameworks to enhance the overall efficiency of the tax system.

Conclusion

The deadline for IT3(t) submissions is fast approaching. Neglected trust administration is now catching up with taxpayers, and it is crucial to seek appropriate advice to rectify tax affairs. SARS is closing the net in order to prevent a leak in its revenue and will compare all the relevant parties’ tax return submissions to ensure the correct persons are taxed and that it collects taxes due to it.