Wednesday 26 June 2013

The Future Taxation of Trusts

In the National Budget, tabled in Parliament on 27th February 2013, the Minister of Finance indicated that government was proposing several legislative measures during 2013/14 regarding trusts to curtail perceived tax avoidance associated with trusts.  The Treasury also indicated its concern regarding the use of trusts to avoid estate duty, which it intended to review.

It was pointed out that the proposals in the Budget would not apply to those trusts established to cater for the needs of minor children and people with disabilities, that is, so-called special trusts.

Originally, Treasury indicated that discretionary trusts should no longer act as flow-through vehicles, with the result that a trust should be taxed as a separate and distinct entity.  It was expected that legislation would be introduced whereby trusts would be liable to pay tax in its' own right without the possibility of passing income and capital gains through to beneficiaries.  

However, the Budget documentation was somewhat unclear in that it indicated that, to the extent that a trust derives taxable income and distributes that to a beneficiary, such amount would be deductible for the trust, and the beneficiary would then be taxed thereon as having received ordinary revenue.

The Minister of Finance indicated that trading trusts would similarly be taxable at the entity level, with distributions being treated as deductible payments to the extent of the trust’s taxable income.  It was pointed out that trusts would be regarded as trading trusts where they either conducted a trade or where the beneficial ownership interests in the trust were freely transferrable.  Some years ago, government attempted to define trading trusts in order to regulate the manner in which such trusts should be taxed, but eventually abandoned the idea because it was unable to comprehensively define what should constitute a trading trust.

Finally, the budget indicated that distributions received from offshore foundations will always be treated as ordinary revenue in the future.

To date, no draft legislation has been released setting out the manner in which government intends to deal with the taxation of trusts in the future.

On 14th June 2013, a meeting was held by representatives of the National Treasury and the Commissioner: South African Revenue Service with representatives of the Fiduciary Institute of Southern Africa, Financial Planning Institute, Law Society of South Africa, South African Institute of Chartered Accountants, South African Institute of Tax Practitioners and the Society of Trust and Estate Practitioners, to discuss the taxation of trusts in the future.

It would appear that National Treasury is concerned that trusts are being used for tax avoidance purposes, and it appears that National Treasury wishes to understand the position better.

The delegates of the meeting were also asked how frequently foundations are used and the reasons therefore.  It was indicated that foundations are not widely used, and this aspect will probably be investigated further.

In addition, the meeting discussed interaction between the Master’s Office and the Commissioner: SARS.  It is more than likely that the tax returns submitted by trusts will become more onerous so that greater disclosure regarding the activities conducted by trusts are fully disclosed to SARS.

The National Budget estimated that estate duty would contribute some R900 million in the 2013/14 fiscal year, which represents a small part of budgeted state revenue.  It remains unclear why estate duty continues to exist.  Ideally, the taxation of trusts, capital gains tax and estate duty should be reviewed holistically to formulate a sound fiscal policy.  The Minister of Finance announced on 27th February 2013 that Judge D Davis of the High Court would chair a commission of enquiry into the tax structure of South Africa.  It is hoped that that commission will review the taxation of trusts in South Africa, taking account of the capital gains tax and estate duty implications relating thereto.

National Treasury indicated in the meeting held on 14th June 2013 that no tax changes regarding trusts have been finalised, and that any amendments proposed to the taxation of trusts will be discussed in depth and a discussion paper released for comment, but this is not likely to happen in the short term.

The 2013 Taxation laws Amendment Bill is due to be released shortly, which will contain most of the amendments required to give effect to the tax policy decisions contained in the 2013 Budget.

Taking account of the meeting held on 14th June 2013, it would appear that no amendments to the taxation of trusts will be contained in the 2013 Taxation Laws Amendment Bill, but that the matter will be properly reviewed and considered before amendments are made.  This move should be supported, as it is far better that the taxation of trusts is reviewed holistically as opposed to introducing ad-hoc amendments to address perceived tax avoidance.

Monday 10 June 2013

Receiver Throws Information Net Wider

On 5th April 2013, the Commissioner: South African Revenue Service issued Government Notice number 260, which appeared in Government Gazette number 36346 on 5th April 2013, setting out returns of information which must be submitted by third parties in terms of section 26 of the Tax Administration Act, No 28 of 2011. 

It is appropriate to point out that, on 29th February 2012, the Commissioner: South African Revenue Service published a Government Notice requiring reporting institutions to furnish bi-annual returns of investment and interest with effect from the 2013 year of assessment.  That government notice required certain financial institutions to supply extensive information to the Commissioner: SARS.  As a result of the Tax Administration Act taking effect, it was necessary for a new notice to be published specifying information to be supplied by various third parties to Commissioner: SARS.

Hackles may rise as this move could be seen as a violation of the taxpayer’s right to privacy
At the time that the Tax Administration Act was being finalised, it was indicated that the legislation was being enhanced to improve the gathering of information from third parties by the Commissioner: South African Revenue Service, so as to increase the levels of tax compliance in South Africa and to assist in the further pre-population of tax returns to be submitted by individuals.

The latest notice requires financial institutions to supply details of retirement annuity contributions paid by taxpayers and for medical aid schemes to supply details of contributions made by persons in respect of the medical scheme, as well as all expenses paid for a person by a medical scheme.  

These two particular requirements will assist SARS in pre-populating tax returns to be lodged by individuals.  In addition, financial institutions in receipt of premiums paid for income protection policies must disclose that to the Commissioner, which should assist taxpayers in satisfying the Commissioner: SARS as to the deductibility of premiums paid on income protection policies.

The notice issued on 5th April 2013 requires the following persons to submit a return in the manner prescribed in the notice:

  •          banks regulated by the registrar of banks in terms of the Banks Act or the Mutual Banks Act;
  •          co-operative banks regulated by the Co-operative Banks Development Agency in terms of the Co-operatives Banks Act;

  •          the South African Post Bank Limited, regulated in terms of the South African Post Bank Limited Act;
  •          financial institutions regulated by the executive officer, deputy executive officer or board, as defined in the Financial Services Board Act, whether in terms of that Act or any other act;

  •          companies listed on the JSE and connected persons in relation to the companies that issue bonds, debentures or similar financial instruments;

  •          state-owned companies, as defined in section 1 of the Companies Act that issue bonds, debentures or similar financial instruments;

  •          organs of state, as defined in section 239 of the Constitution of the Republic of South Africa that issue bonds, debentures or similar financial instruments;

  •          any person, including a co-operative, as defined in section 1 of the Income Tax Act, who purchases any livestock, produce, timber, ore, mineral or previous stones from a primary producer other than on a retail basis;

  •          any medical scheme registered under section 24 of the Medical Schemes Act;

  •          any person who, for their own account, carries on the business as an estate agent, as defined in the Estate Agency Affairs Act and who pays to or receives on behalf of a third party any amount in respect of any investment, interest or the rental of property; and

  •          any person who, for their own account, practices as an attorney, as defined in section 1 of the Attorneys Act, and who pays to or receives on behalf of a third party any amount in respect of any investment, interest or the rental of property.

The notice then describes the nature of the information to be provided by the categories of persons specified in the notice.  The Commissioner is seeking information regarding amounts paid or received in respect of or by way of any investment, rental of immovable property, interest or royalty, and transactions that are recorded in an account maintained for another person, that is, so-called transactional accounts like bank accounts.

Furthermore, those persons involved in the purchase and disposal of financial instruments for clients are required to disclose details of amounts paid in respect of the purchase and disposal of financial instruments.

Insurance companies are required to report the payment of amounts made upon the death of a person in terms of an insurance policy.

Monies paid in respect of the purchase, sale or shipment of livestock, timber, ore, mineral, precious stones or by way of a bonus, in the case of a co-operative, are required to be disclosed to the Commissioner by affected persons.

The affected third parties are required to submit the requisite IT3 form to the Commissioner, or, alternatively, a data file compiled in accordance with SARS’s business requirements specification for IT3 data submission.

The requirement to submit information to the Commissioner is onerous in that the returns specified in the notice containing all information required in respect of the period from 1 March to 31 August of each tax year must be submitted by 31 October and, in respect of the period from 1 March to the end of February, must be submitted by 31 May.  This increases the administrative burden on the affected persons, and will, no doubt, require amendments to computer systems to facilitate the transfer of data electronically to the Commissioner.

It is indicated that, where the third party return comprises twenty or less detailed records, the declaration portion of the return and detailed portion of the return must be submitted electronically using the SARS e-filing platform, or manually to the SARS office closest to the person’s place of business.

For those larger organisations, and where the third party return comprises twenty-one to fifty thousand detailed records, it is necessary to submit the declaration electronically using SARS’s e-filing platform, and the detailed portion of the return must be submitted electronically, using SARS’ hypertext transfer protocol secure (https) bulk data file platform. 

In the event that the third party return comprises more than fifty thousand detailed records, the declaration portion of the return must be submitted electronically using SARS’ e-filing platform, and the detailed portion of the return must be submitted electronically, using SARS’ managed data transfer platform.

The Government Notice provides that alternative arrangements may be made by affected persons as to how the information should be transferred or made available to SARS.

The Government Notice was issued so as to enable SARS to enhance third party information received by it, to ensure enhanced compliance with the tax laws of South Africa, and, also, to facilitate a greater degree of pre-populating of tax returns issued by SARS for completion by individuals.

Some commentators may seek to argue that the provision of the information called for violates the taxpayer’s right to privacy, but it must be remembered that any right contained in the Constitution is capable of limitation under section 36 of the Constitution of the Republic of South Africa, No 108 of 1996, as amended.  

The request of the information set out in the notice may be construed as a violation of the right to privacy, but it is necessary for SARS to call for such information in order to comply with its obligations in administering the tax laws of South Africa, and, on this basis, the limitation of rights provision contained in section 36 of the Constitution would assist SARS should the information called for be challenged by taxpayers or affected persons.  

 Dr Beric Croome is a tax executive at ENS.This article first appeared in Business Day, Business Law & Tax Review, June 2013. Free Image from FreeDigitalImages

Friday 7 June 2013

Forum On Tax Administration – Moscow Meeting

The Forum on Tax Administration (‘FTA’), comprising the heads of tax administrations from 45 economies, met in Moscow for the 8th meeting of the FTA.  The final communiqué issued pursuant to the Moscow meeting indicated that the FTA is dedicated to securing high levels of voluntary tax compliance by providing excellent service and effectively addressing tax evasion and aggressive tax avoidance in all its forms, including the underground economy.
The communiqué indicated that the participating tax administrations are committed to undertaking action jointly to improve the effectiveness of tax administrations, address trans-national tax fraud, tax evasion and aggressive tax avoidance.

The Moscow communiqué pointed out that, where the tax administrations are detecting offshore evasion, they will share information with their partner countries.  It was pointed out that tools have been developed to enhance the gathering of information and cross-border financial transfers, to understand banking transactions and to identify the beneficial owners of complex structures.  Furthermore, Australia, the United Kingdom and the United States of America have secured significant data revealing complex offshore structures, which will be utilised by the revenue authorities in those countries to identify participants in tax evasion and take action against those persons where necessary.  It would appear that the three countries concerned will share the information obtained by them to other members of the FTA in accordance with international agreements.

Over the last few years, the number of agreements allowing for the exchange of information between countries has increased, and this has facilitated the greater flow of tax information between states.  The FTA has indicated that it will rely more and more on the provisions of the increased network of agreements, allowing for the exchange of information and, also, by providing necessary training to tax auditors to ensure the effective and secure use of information received under the various international agreements.  It must be noted that the automatic exchange of information between states has increased, and that this will ultimately become the standard to which various countries will comply under international agreements.

The Moscow communiqué also referred to the OECD’s work on Base Erosion and Profit Shifting (‘BEPS’), which will initiate an action plan intended to modernise international tax instruments and standards to counter BEPS, particularly in the area of international taxation, transfer pricing and the digital economy, in an effective manner.  Governments around the world are concerned about the erosion of their tax base and shifting of profits to lower tax jurisdictions, particularly in the current economic climate, which has created difficulties for tax authorities collecting sufficient tax for the various governments around the world.

In addition, the communiqué indicates that tax administrations must enhance their efficiency and offer their citizens and business quality service and support for voluntary compliance.  It was pointed out that the effective management of tax debts, including tax debts that arise cross-border, is a key priority, and will be a particular focus of attention in the future.
When reference is made to the various initiatives underway, such as the OECD’s BEPS initiative, the work of the FTA and other organisations, it is important that businesses review the manner in which they conduct their tax affairs to ensure that they comply with their fiscal obligations in the various countries within which they operate.

All revenue administrations need also to take account of the rights which taxpayers have in their dealings with the revenue authority, and South African taxpayers can seek reliance on the Constitution of the Republic of South Africa, Act 108 of 1996, in ensuring that their rights are not violated by SARS.  Various organisations have undertaken research into the design of a model taxpayers’ charter to prescribe levels of taxpayers’ rights to protect taxpayers in their dealings with tax administrations around the world.

It is important, taking account of the pressures facing revenue authorities to raise revenue in difficult economic times, that taxpayers’ rights are protected, and are not disregarded when collecting tax that the revenue authorities believe may be due.

This article by Dr Beric Croome first appeared in the May 2013 edition of tax ENSight newsletter.  Free image from ClipArt