The Taxing Affair of Tax Avoidance on Trusts

In the National Budget speech, presented to Parliament on 27 February 2013, the Minister of Finance indicated that legislative measures will be introduced to address tax avoidance arising from the utilisation of trusts.  

The National Treasury has since indicated that a discussion paper will be released dealing with the taxation of trusts generally prior to amending legislation being introduced.  Initially, there were concerns that the taxation of trusts would be amended in the 2013 Draft Taxation Laws Amendment Bill, but, fortunately, no amendments are contained in the legislation which was released for public comment on 4 July 2013.

South African residents who are beneficiaries of foreign trusts
must record and report all distributions

It is appropriate, therefore, to revisit the tax consequences facing South African residents who are beneficiaries of foreign trusts.

A significant number of South Africans applied for and received amnesty under the Exchange Control Amnesty and Amendment of Taxation Laws Act, No 12 of 2003, whereby prior violations of exchange control regulations and tax laws of South Africa were regularised.  

As a consequence of having applied for and having received amnesty, the South African resident who applied for tax amnesty regarding funds remitted from South Africa to a foreign trust had to make an election under section 4 of the amnesty legislation that any amount of income derived by the foreign trust would remain attributable to that resident so long as they are alive.

Thus, as and when the foreign trust derives income from the investments held by it in the form of interest, rental or foreign dividends, those amounts of income must be disclosed and declared to tax in South Africa by the person who applied for and received amnesty in terms of the 2003 amnesty legislation.  Likewise, should the foreign trust dispose of assets and realise capital gains thereon, the South African resident is required to declare those capital gains for tax purposes in South Africa.

When the person who funded the trust ultimately passes away, they are deemed to have disposed of the assets held by the foreign trust at market value on the date before their date of death and are liable to capital gains tax on the increase in value of the assets owned by the trust compared to the cost thereof. 

Should a trust for which amnesty was received subsequently make distributions to a South African resident after the funder of the trust has passed away, it is important to ascertain what amounts were previously liable to tax in South Africa, as those will not be liable to tax in the hands of the beneficiaries upon receipt as they would have been taxed previously.  

Clearly, income derived by the foreign trust after the date of death of the funder will, on distribution to a South African resident, fall to be taxed in their hands, in terms of section 25B(2A) of the Income Tax Act, No 58 of 1962, as amended.

With effect from 1 November 2010 until 31 October 2011, those taxpayers who had chosen not to apply for the amnesty under the amnesty legislation were entitled to seek relief from both the tax and exchange control authorities in terms of the Voluntary Disclosure Programme and Taxation Laws Second Amendment Act, No 8 of 2010. 

Where a South African resident has donated funds to a foreign trust and the trust derives income as a result of such donation, the income attributable to such donation will fall to be taxed in the hands of the South African resident under section 7(8) of the Act.  

Once again, once the funder of the foreign trust passes away, the deeming rule will cease to operate and it will be necessary to ascertain the nature of distributions made by the foreign trust to the South African resident beneficiaries to determine the manner in which such distributions should be dealt with from a tax point of view.

It must be remembered that the burden of proof, which was previously contained in section 82 of the Act and which is now contained in section 102 of the Tax Administration Act, No 28 of 2011, falls on the taxpayer to prove whether an amount received is exempt or otherwise not taxable.  

Thus, where a South African resident receives a distribution or an award from a foreign trust, it will be necessary for the beneficiary to satisfy the Commissioner: South African Revenue Service as to the underlying nature of the award received by them.  Where the amount received represents the accumulation of income derived by the foreign trust over many years, such amount will fall to be taxed as normal income in the hands of the South African resident in terms of section 25B(2A) of the Act.  

This is particularly the case where a foreign trust was created by a non-resident and subsequently that trust makes awards to South African tax resident beneficiaries.  

Where, however, the trust was funded by a South African resident and amnesty applied therefore or, alternatively, relief under the voluntary disclosure programme, it becomes necessary to determine whether the amounts were previously taxed in the hands of a resident beneficiary or not.

Where the distribution received by a South African tax resident beneficiary can be shown to originate out of capital gains realised by the foreign trust, those gains will fall to be taxed in the normal way insofar as capital gains are concerned, with the maximum tax rate of 13.33% applicable.

When the funds are transferred from the foreign trust to the South African resident beneficiary, such funds will enter the country via normal banking channels, and the South African recipient will be required to inform their bank as to the nature of the proceeds for exchange control purposes.  The bank receiving the funds is required to report the funds received to the South African Reserve Bank under the applicable Balance of Payment (“BOP’) code, which is a four digit code specifying the precise nature of the funds received from abroad for reporting purposes.

With effect from 1 April 2012, South Africa changed the manner in which both domestic and foreign dividends are taxed.  When a South African company pays a dividend to a shareholder, the company is required, ignoring exemptions and double taxation agreements, to withhold tax at the rate of 15%, such that the South African individual shareholder will receive 85% of the cash dividend declared to shareholders.

Section 10B of the Act was introduced to ensure that domestic and foreign dividends are taxed uniformly, with the result that a South African resident receiving foreign dividends will be liable to tax thereon at the maximum rate of 15%.  Thus, to the extent that a South African resident receives foreign dividends from a foreign trust, those dividends will be liable to tax at a maximum of 15%.

Where South African residents have illicitly removed funds from South Africa and created foreign trusts utilising such funds, they can utilise the Voluntary Disclosure Programme contained in the Tax Administration Act to regularise their income tax defaults with the Commissioner: SARS.  Unfortunately there is no current voluntary disclosure programme applicable insofar as the exchange control authorities are concerned.  

However, persons wishing to regularise foreign assets held in contravention of the exchange control regulations should approach an authorised dealer or, alternatively, the Financial Surveillance Department of the South African Reserve Bank with a view to regularising the funds held abroad without the consent of the authorities. 

The current voluntary disclosure programme contained in the Tax Administration Act is not as beneficial as that which was available in 2010/2011, in that the interest not paid on the tax due to the Commissioner remains payable.  

Generally, in the understatement penalty which would otherwise have been imposed should be waived, and, furthermore, any applicant will not be subject to criminal prosecution, which would be the case if the Commissioner were to identify the person prior to them approaching SARS for relief under the voluntary disclosure programme.  

Where funds have been removed from South Africa in contravention of the exchange control regulations, a levy will remain payable to the South African Reserve Bank to regularise the assets held offshore.

It is important, though, that South African residents who receive distributions from a foreign trust are able to ascertain the nature thereof so as to properly record and report the distribution in their personal income tax returns and account for the correct amount of tax thereon.  

If the trustees of the foreign trust are unable to assist the South African resident beneficiary as to the true composition of the distribution made to the South African resident beneficiary, it will be extremely difficult for the South African tax resident to satisfy the Commissioner that the amount received should not be subject to normal tax.  

It would far preferable if the foreign trustees are in a position to indicate the underlying nature of the amount awarded to the South African beneficiary indicating what part of the distribution relates to interest, rentals, foreign dividends, capital gains or, alternatively, awards of capital originally received by the trust.  

It remains to be seen how the tax authorities will ultimately change the rules applicable to taxing trusts in South Africa.

Dr Beric Croome is a Tax Executive at Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review (September 2013). Image purchased from iStock

Amendment takes Human Error into Account

In the National Budget, presented on 27 February 2013, the Minister of Finance indicated that the rules regulating the imposition of the understatement penalty in terms of the Tax Administration Act, No 28 of 2011, would be amended to deal with those case where a taxpayer made an inadvertent error in filing a tax return with the South African Revenue Service.  

This was on the basis that, without the amendment, a taxpayer could have faced a penalty of 25% or 50%, even though the taxpayer had made a genuine mistake such as a transposition error in filing their return.

Previously, under section 76 of the Income Tax Act, No 58 of 1962, as amended (‘the Act’), the Commissioner was empowered to levy additional tax of 200% of the tax which should have been paid by a taxpayer.  

The Commissioner was then conferred a discretion to reduce the additional tax where there were extenuating circumstances, and, furthermore, it was required that the taxpayer had the intent to evade taxation for the additional tax to be imposed.  

Thus, the provisions contained in section 76 of the Act were subject to the exercise of a discretion by the Commissioner, and determined by taking account of subjective criteria.

With the introduction of the Tax Administration Act, the penalty regime was revised to introduce objective criteria such that the amount of penalty would be determined by the taxpayer’s behaviour.

Currently, the understatement penalties which may be levied by SARS under the Tax Administration Act are as follows:

Item	Behaviour	Standard Case	If obstructive or if it is a ‘repeat case’	Voluntary disclosure after notification of audit	Voluntary disclosure before notification of audit
(i)	‘Substantial understatement’	25%	50%	5%	0%
(ii)	Reasonable care not taken in completing return	50%	75%	25%	0%
(iii)	No reasonable grounds for ‘tax position’ taken	75%	100%	35%	0%
(iv)	Gross negligence	100%	125%	50%	5%
(v)	Intentional tax evasion	150%	200%	75%	10%

Section 221 defines a “substantial understatement” as a case where the prejudice to SARS exceeds a rate of 5% of  the tax  properly chargeable or refundable under a tax act for the relevant tax period or the amount of R1 million.  

Thus, where a taxpayer submits a tax return which is subsequently audited by SARS and an adjustment is made thereto such that the tax payable is increased by R1 million or 5% of the amount of tax properly chargeable under a tax act, the penalty which may be levied may amount to 25% for the first occasion of such an event or 50% where the taxpayer has previously been subjected to an understatement penalty within the last five years.

Thus, the quantum of the understatement penalty which may be levied on a taxpayer will be determined by the taxpayer’s behaviour and the level of penalty will increase depending on the nature of the behaviour of the taxpayer.

On 4 July 2013, the National Treasury released the draft Tax Administration Laws Amendment Bill 2013 for comment.  That Bill proposes various changes to the imposition of the understatement penalty such that the level of penalties is reduced in various cases.  

Accordingly, the revised table will take effect on that date that the Bill is promulgated. 

The Bill therefore proposes that the understatement penalty table be amended along the following lines:

Item	Behaviour	Standard Case	If obstructive or if it is a ‘repeat case’	Voluntary disclosure after notification of audit	Voluntary disclosure before notification of audit
(i)	‘Substantial understatement’	10%	20%	5%	0%
(ii)	Reasonable care not taken in completing return	25%	50%	15%	0%
(iii)	No reasonable grounds for ‘tax position’ taken	50%	75%	25%	0%
(iv)	Gross negligence	100%	125%	50%	5%
(v)	Intentional tax evasion	150%	200%	75%	10%

The draft memorandum on the objects of the Tax Administration Laws Amendment Bill 2013 indicates that the rationale for amending section 223 is to align the percentage of the penalty with comparative tax jurisdictions where largely similar penalty regimes apply. 

The Bill reduces the level of understatement penalty in respect of substantial understatement, reasonable care not taken in completing a return and no reasonable grounds for tax position taken by the taxpayer.

The version of the draft Bill released on 4 July 2013 indicated that the reduction in the level of understatement penalty would take effect from 1 October 2012.  

However, on 5 July 2013, the SARS website indicated that the draft Tax Administration Laws Amendment Bill 2013 and its memorandum of objects had been replaced with new versions.  

From a review of the versions released on 5 July 2013, it is apparent that it is now proposed that the effect date of the changes in the level on understatement penalty will be the date on which the Tax Administration Laws Amendment Bill 2013 is enacted.  

Those taxpayers who have received assessments from SARS and have been subjected to the understatement penalty will feel aggrieved in that the level of understatement penalty imposed on them is greater than what will be applied to taxpayers in future years, even though SARS admits that the sanctions originally contained in section 223 of the Tax Administration Bill were out of line with comparative tax jurisdictions where similar penalty regimes are applied.

It must be remembered that SARS is compelled to remit a penalty imposed for a substantial understatement in terms of section 223(3) of the Tax Administration Act where the taxpayer made full disclosure of the arrangement as defined in section 34 of the Tax Administration Act that gave rise to the prejudice to SARS by no later than the date that the relevant return was due to SARS and was in possession of an opinion by a registered tax practitioner in the prescribed form.  

The draft Tax Administration Laws Amendment Bill 2013 proposes an amendment to section 223(3)(b) that the opinion must be issued by an independent tax practitioner.  The draft memorandum on the Tax Administration Laws Amendment Bill 2013 indicates that the amendment requires that the opinion relied on by the taxpayer must be given by a tax practitioner that is independent from the taxpayer.  

The commentary on the draft Bill indicates that opinions prepared by in-house tax practitioners, in, for example, a large corporate group, will not qualify as a result of their potential vested interests relating to such matters.

The Bill also proposes an amendment to section 224 of the Tax Administration Act, stating unequivocally that a taxpayer has the right to object and appeal against an understatement penalty.  It is questionable whether this amendment is necessary in light of the provisions contained in section 104 of the Tax Administration Act, which confers the right to object against assessments issued to taxpayers.

It is clear that the reduced level in the quantum of the understatement penalties proposed in the draft Bill are not as onerous as the level of penalties currently contained in the Tax Administration Act.  It is unfortunate that the amendments will not benefit those taxpayers who have been subjected to understatement penalties since 1 October 2012.

In practice, it would appear that SARS takes the view that the understatement penalty should apply to all adjustments made to tax returns submitted by taxpayers, even where those tax returns were submitted prior to 1 October 2012, that is, the date on which the Tax Administration Act took effect.  

Based on the rule of law and the principles relating to the interpretation of statutes, it would appear that the provisions of section 270(6) of the Tax Administration Act should require SARS to consider imposing additional tax, in the case of income tax, under section 76 of the Act, or other equivalent provisions in other tax acts, in respect of events which took place prior to 1 October 2012 and not to levy the prescriptive understatement penalty contained in section 223 of the Tax Administration Act.  

No doubt the interpretation of the application of the understatement penalty to adjustments made after 1 October 2012 to tax assessments relating to years of assessment prior to 1 October 2012 will, ultimately, be determined by the courts.

 ■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law and Tax Review, Aug 2013. 

The Future Taxation of Trusts

In the National Budget, tabled in Parliament on February 27, the Minister of Finance indi­cated that government was proposing several legislative measures during 2013/14 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 their 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.

National Treasury is concerned 

that trusts are being used for tax avoidance  purposes

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 June 14, 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 wishes to understand the position better.

The delegates to the meeting were also asked how frequently founda­tions are used and the reasons there­ fore. 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 be­ come more onerous, so that greater disclosure regarding the activities conducted by trusts will be made 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 February 27 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 June 14 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 has been released, which contains 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 June 14, no amendments to the taxation of trusts are contained in the 2013 Taxation Laws Amendment Bill, but 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 than introducing ad-hoc amendments to address perceived tax avoidance.

Dr Beric Croome is an executive in the Tax department at Edward Nathan  Sonnenbergs. This article first appeared in tax ENSight, June 2013 and in The Times newspaper, Legal Times supplement on 2 August 2013.

Video Presentation on Taxpayers' Rights under the TAA (Courtesy of SAIT 4th National Tax Conference)

From the South African Institute for Tax Practioners' channel on YOUTUBE comes this hour long video of my presentation on Taxpayers' Rights under the TAA at the recent SAIT 4th National Tax Conference.

(video courtesy of SAIT)

Tax Evaders Find it Difficult to Hide Across Borders

South Africa and the United Kingdom concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, which was gazetted in Government Gazette 24335 of 31 January 2003.  That agreement was subsequently amended by Government Notice 52 in Government Gazette 34971 on 2 February 2012 with effect from 13 October 2011.

The amendments to the treaty concluded by South Africa and the United Kingdom dealt with, inter alia, the exchange of information regulated by article 25 and article 25A dealing with assistance in the collection of taxes.

SARS  and  UK  revenue   can assist in targeting 

tax debtors in each other's countries

Article 25A of the treaty provides that the South African Revenue Service (‘SARS’) and Her Majesty’s Revenue and Customs (‘HMRC’) shall assist each other in the collection of taxes.

Article 25A refers to any amount owed in respect of taxes of every kind and description imposed on behalf of South Africa and the United Kingdom or of their political subdivisions or local authorities, so long as the taxation in question is not contrary to the tax treaty or any other instrument to which the two countries are parties, as well as interest, administrative penalties and the cost of collection or conversancy related to such tax.

The treaty provides that, where a tax debt is enforceable under the laws of South Africa, and is owed by a person who cannot under the laws of South Africa prevent its collection, that tax debt shall, at the request of the Commissioner: South African Revenue Service be accepted for purposes of collection by the competent authority of the United Kingdom.  Article 25A(3) provides that the tax debt shall be collected by the United Kingdom in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes, as if that debt were an amount due to the United Kingdom.  The treaty also requires South Africa to assist the United Kingdom in collecting tax debts due by United Kingdom taxpayers from assets they may have in South Africa.

Before the insertion of article 25A into the tax treaty, SARS was unable to assist HMRC in the collection of taxes due to it from assets of United Kingdom taxpayers located in South Africa  and, similarly, HMRC was unable to assist SARS in recovering taxes due to SARS from assets located in the United Kingdom belonging to South African taxpayers.  The question that did arise at the time that the article was inserted into the treaty, was whether the assistance in the collection of taxes could apply to taxes which arose prior to the insertion of the article into the tax treaty.

This question was considered in the United Kingdom’s Court of Appeal in the case of Ben Nevis (Holdings) Ltd and Anor v Commissioner for HM Revenue and Customs [2013] EWCA Civ 578.  Ben Nevis is a company incorporated in the British Virgin Islands, which was owned and controlled by a Mr David King and/or his trustees.  The judgment indicates that Ben Nevis is liable to the Commissioner: SARS for taxes from the 1998 to the 2000 years of assessment amounting to approximately R2,6 billion following the final determination of a tax appeal in October 2010.  Subsequently, judgment was taken against Ben Nevis in proceedings in the courts in South Africa.

SARS took the view that, when Mr King became aware that SARS was investigating Ben Nevis’ tax affairs, he transferred Ben Nevis’ assets to another company incorporated in British Virgin Islands, and that, as a result thereof, funds of approximately £7,8 million had been credited to a bank account in London in the name of Metlika Trading Limited.

As a result of the protocol amending the tax treaty between South Africa and the United Kingdom taking effect on 13 October 2011, which now, for the first time, allowed for mutual assistance in the collection of taxes, a request was made by SARS to HMRC that it assist SARS in the collection of the tax debt due.

The High Court in the United Kingdom had previously dismissed Ben Nevis’ application to set aside the order granting judgment against Ben Nevis in respect of the tax due to SARS.

Historically, the courts in the United Kingdom have declined the request to entertain claims for the enforcement of revenue or other public laws of a foreign state.  This flows from the well-established principle that the courts of one country will not enforce the revenue laws of another country.  However, this principle has been watered down as a result of international agreements concluded by various governments, and, particularly, the Joint Convention on Mutual Administrative Assistance in Tax Matters, which include a provision for assistance in the recovery of taxes.

Originally, as pointed out above, the tax treaty concluded by South Africa and the United Kingdom did not contain any provision for mutual assistance in the collection of taxes.  Article 25A was inserted by virtue of the protocol conclude by the two governments, with effect from 13^th October 2011.

Ben Nevis sought to argue that article 25A of the tax treaty could not apply  as a result of the fact that the tax debts were due in respect of years of assessment commencing prior to the coming into force of the 2002 convention concluded by South Africa and the United Kingdom.  Thus, Ben Nevis sought to argue that the effect of article 25A and article 27 of the 2002 convention limited the scope of article 25A to tax debts on or after 1 January 2003.  The tax owed by Ben Nevis related to the 1998 to 2000 assessments, that is, prior to the 2002 convention and most certainly prior to the date on which article 25A was inserted into the tax treaty concluded between South Africa and the United Kingdom.

Lord Justice Lloyd Jones reviewed various cases dealing with the interpretation of international agreements and also the relevant articles of the Vienna Convention on Treaties and considered the retrospective effect of article 25A.

The Court also referred to a memorandum of understanding that was agreed to by South Africa and the United Kingdom and criticised the fact such memorandum could only be obtained by taxpayers by making a Freedom of Information Act request.  The Court, therefore, expressed the view that it is in the interest of fairness to taxpayers that memoranda of understanding agreed by contracting states should be readily available to the public.

The Court reached the conclusion that the application of article 25A to a request for assistance in the enforcement of tax debts arising before the protocol came into effect did not amount to retrospective application, nor was it unfair that the protocol should apply to such pre-existing tax liabilities.  The Court also considered the effect of the Finance Act of 2006, and whether that Act permitted HMRC to conclude an agreement with another country such that mutual assistance in the collection of tax debt should apply retrospectively.

At the end of the day, the Court decided that the presumption against retrospective effect did not apply to Ben Nevis, because the application of article 25A in respect of taxes arising before 19 July 2006, that is, the date on which the relevant provisions of the Finance Act took effect, or 1 January 2003, did not involve any objectionable retrospective effect.  The Court accordingly decided that article 25A could be utilised by HMRC in assisting SARS in recovering tax liabilities which arose prior to the insertion of article 25A into the tax treaty concluded by South Africa and the United Kingdom.

It is interesting to note that the tax treaty concluded by South Africa and Australia contains a similar provision dealing with the assistance in the collection of taxes at article 25A which appeared in Government Gazette 31721 of 23 December 2008.  The press has reported that Mr Tannenbaum, the alleged mastermind of a Ponzi scheme, is indebted to SARS in the amount of R747,990,921.00.  Mr Tannenbaum would appear to currently reside in Australia, and, when reference is made to the decision in the Ben Nevis case, it is more than likely that SARS will seek assistance from the Australian Tax Office to recover the taxes due as a result of the alleged Ponzi by relying on article 25A of the treaty concluded by South Africa and Australia.

Previously, tax treaties did not envisage countries assisting each other in the collection of tax debts, but this has changed, and the OECD’s Model Convention now contains such provisions. Furthermore, the Joint Convention on Mutual Administrative Assistance in Tax Matters includes a provision for the assistance in recovery of taxes.  

Thus, governments will assist each other in recovering taxes due by taxpayers of other countries from assets that those taxpayers may have in the other country.

■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law and Tax Review, July 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.

• This article by Dr Beric Croome first appeared in tax ENSight, June 2013 Image from South African Consulate General - New York City