Fines given to trustees and trust service providers, an April fools’ joke? Act today 31 March 2023!

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Even though measures were introduced by the government (silently on 22 December 2022) to strengthen South Africa’s anti-money laundering and terror financing legislation in an attempt to remain off the Financial Action Task Force (FATF) Greylist, after South Africa’s performed weakly on the measurement of the effectiveness of the implementation of the FATF recommendations (South Africa failed in all 11 effectiveness measures), few trustees and even trust service providers are aware how it directly impacts them and what is expected of them. Part of the remedial efforts included amending five laws key to the effectiveness of South Africa’s anti-money laundering /combatting of terrorist financing measures, the Financial Intelligence Centre Act, namely the Non-profit Organisations Act, the Trust Property Control Act, the Companies Act, and the Financial Sector Regulations Act. Of those, amendments to the Trust Property Control Act and the Financial Intelligence Centre Act are most relevant for trustees and trust service providers. Overnight, the landscape of trusts has changed, which added extra layers of compliance as well as exposure to risk, as non-compliance may lead to a fine not exceeding R 10 million or imprisonment not exceeding 5 years or both. Most of the amendments have an effective date of 1 April 2023; well for trustees as the Masters of the High Court are clearly not ready to receive and maintain digital registers as required of them. This imposes a higher risk for trustees (any one of them) and trust service providers, as authorities may have to knock on their doors to verify their compliance. Traditionally, huge reliance was placed by family trustees on the independent trustee (and even the trust service provider) in meeting trustee obligations. The amendments apply equally to all trustees and each and every trustee has to cooperate to remain compliant. Although the regulations determining what information is to be kept are not yet Gazetted, trustees are advised to work on the draft regulations issued on 13 January 2023.

Do trustees and directors have similar fiduciary duties?

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Even though a trust is a unique entity, people often try to make sense of its nature by comparing it to a company, as a company is a well-known entity through which people operate their businesses.

Both a trustee and a director have similar fiduciary duties bestowed upon them. A fiduciary duty is an onerous, legal obligation (a duty of loyalty and care) of a person managing property or money belonging to another person to act in the best interests of such a person. These fiduciary duties are manifested either through the acts that govern trusts and companies, or by common law. Common law – also known as judicial precedent, judge-made law, or case law – is the body of law developed by judges and Courts. Common law stands on equal footing with statutes, which are adopted through the legislative process. The defining characteristic of common law is that it arises as a legal precedent that can be applied to similar situations.

New onerous legislation (with penalties for non-compliance) for trustees - effective date 1 April 2023

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A lot has recently been said in the media about the possibility and impact of a Financial Action Task Force (FATF) greylisting for South Africa in February this year. The fact is it is no longer relevant whether or not we will be greylisted, as new measures were already legislated in late December 2022 to strengthen South Africa’s anti-money laundering and terror financing legislation, in an attempt to prevent a potential greylisting. Few are aware of exactly what is expected of them as a result, and even fewer are aware of the massive penalties for non-compliance – a fine not exceeding R 10 million or imprisonment not exceeding 5 years, or both. Most of the amendments have an effective date of 1 April 2023; therefore not a lot of leeway is provided by Government for trustees and service providers to get their acts together.

We are excited to be at the forefront and disrupters in this space and can assist boards of trustees and trust service providers to meet their obligations and to minimalise their risks with the implementation of these new measures. These new requirements also create new business opportunities/income streams for some accountants and trust service providers, whom their clients rely on, for assistance to not fall foul of these new measures introduced by Government.

Get the trust’s tax right, especially with multiple trust structures

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With SARS’s renewed focus on trusts (on 28 September 2022 they issued a media release with the heading “SARS sharpens its focus on Trusts”), all role players in a trust have to ensure that the taxation rules applicable to trusts are understood and applied correctly. A trust is a unique taxable entity as it is a ‘taxpayer of last resort’. That means that, if the tax rules are applied correctly, other taxpayers such as the funder/donor of the trust, or even its trust beneficiaries, may be taxed on income and capital gains generated in the trust, rather than the trust itself. A recent court case (CSARS v The Thistle Trust) where judgement was delivered on 7 November 2022, demonstrates the uniqueness of trust taxation as well as SARS’s determination to correctly apply trust tax rules. This case highlights the complexity of the taxation of income and capital gains generated in trusts.

Time to protect assets best you can?

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The world has become a challenging place. It has become difficult to make ends meet for many people in South Africa. Living costs have gone up post Covid and especially business owners have been impacted and may even be at risk to loose everything. Pierre-Olivier Gourinchas from the International Monetary Fund (IMF) reckons “the worst is yet to come and, for many people, 2023 will feel like a recession.” It is expected that a third of the global economy will shrink in the next year. Now, more than ever, is it important for estate planners to protect what they have gathered over many years. The times where people treated their estate plans and the execution thereof (including trust structures) ‘slap dash’ are over and even SARS is having a closer look at trusts – refer to their media release on 28 September 2022 with the title “SARS sharpens its focus on Trusts”.

Do not assume your accountant is taking care of the trust’s administration

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Often there is a misconception that financial statements confirm the compliance of a trust. Most of the times the accountant only provides accounting and taxation services to trusts, but does not provide compliance and administration services. There is a material difference between trust administration and accounting for trusts. Although financial information is required to report to trust stakeholders and submit tax returns, a trust that lacks administration and compliance is exposed to risk of attack. SARS and any personal creditors, including a soon-to-be-ex-spouse, can rely on a combination of factors (lack of resolutions, minutes, or a bank account) to request that a court declares the trust the ‘alter ego’ (an extension of oneself) of the founder or controlling trustee, resulting in the disregard of the trust to penetrate the trust. This ‘cost’ may be significantly higher than the effort or the cost required to properly administer a trust in terms of our law. It is important to demonstrate that a trust is managed as a separate entity to the founder, the trustees and its beneficiaries and that trust assets are held and dealt with separately from anyone else.

The trust as a taxpayer

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Some estate planners and trustees are not aware that a trust is regarded as a separate taxpayer, who has to register as such, and who has to submit relevant tax returns.

Is your adviser not taking your trust seriously?

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To my horror I was part of a discussion where a colleague in the fiduciary industry who works at a prominent wealth manager spoke to me about their clients and their service offering. When I asked who takes care of their clients’ trust needs, the reply was: “We have cracked the code, as long as you have the client’s balance sheet, that is where you make money. We realised trust services do not make us money, so we stay clear from that as it is just too risky”. I was horrified and replied: “So are you telling me you do not care about your clients’ needs? Who then takes care of that, as you know as well as I do, clients, especially now, need help and they may rely on you as their primary financial relationship? Do you not even refer them to a reputable trust service provider? The person was speechless.” I then realised the false sense of security that a number of clients experience with their financial service providers – such as their financial advisors, accountants, attorneys and banks - as this seems to be a general issue. SARS and the Master are introducing all sorts of changes. I believe it is the ethical duty and responsibility of professionals to assist their clients, whether they provide trust services themselves or whether they form part of a network of professionals to take care of their clients’ financial needs. It should not only be about their profits. Or they should tell their clients that.