What Is a Trust?

A trust is a legal arrangement in which one or more trustees hold and administer assets for the benefit of beneficiaries, in accordance with a trust deed and applicable law. A trust is generally a separate taxpayer and must meet its own legal, accounting and tax obligations. However, trust income or capital gains may, in certain circumstances, be taxed in the hands of the trust, a beneficiary or another person under the Income Tax Act.

Understanding the SARS Question

The South African personal income tax return asks taxpayers to:

“Mark with an ‘X’ if you received or became entitled to any income as a beneficiary of a trust, or income deemed to be yours under section 7.”

This question must be answered according to the facts of the relevant year of assessment. It is important to distinguish between merely being connected to a trust and actually receiving, becoming entitled to or being taxed on trust income.

When Should “Yes” Be Selected?

A taxpayer may need to answer “Yes” if income was distributed to them by a trust, vested in them or became legally claimable during the year. This may include interest, rental income, dividends, business income or other taxable receipts.

Income does not necessarily have to be physically paid into the taxpayer’s bank account. Depending on the circumstances, an amount may be taxable because it vested in the beneficiary or was attributed to that person under section 7 of the Income Tax Act.

The Impact of Section 7

Section 7 contains attribution rules that may allocate trust income to another person. These rules can apply in circumstances involving donations, settlements, dispositions, minor children, spouses or related arrangements. A person may therefore be taxed on income even if the funds remained in the trust or were paid to someone else.

Beneficiaries, Trustees and Inactive Trusts

Being named as a beneficiary does not automatically mean that trust income must be declared every year. The taxpayer must consider whether income was received, vested or attributed to them.

Similarly, being a trustee does not automatically make all trust income the trustee’s personal income. Trustee fees, remuneration, benefits or reimbursements may, however, have separate tax consequences.

An inactive, dormant or apparently deregistered trust should not automatically be treated as irrelevant. SARS may compare personal returns with trust returns, resolutions, financial statements, bank records and third-party information.

Consequences of Incorrect Disclosure

Incorrect disclosure may result in additional tax, penalties, interest and, in serious cases, criminal consequences. Taxpayers should retain the trust deed, trustee resolutions, financial statements, distribution schedules and proof of payments. Where the position is uncertain, advice should be obtained from a registered South African tax practitioner.