New reporting system in respect of distributions from trusts

SARS currently requires third party declarations of taxpayer activity from banks, financial institutions, medical aid schemes, attorneys, and estate agents. This declaration process ensures that the information relevant to the taxpayer is prepopulated on the taxpayer’s annual income tax return.

The significant differences between distributions declared in the tax returns of beneficiaries and trust distributions declared in the trust tax returns have initiated SARS decision to introduce third party data reporting by trustees.  The first reporting date is still to be promulgated, but SARS has indicated that the first reporting date will be September 2023.

The objective is that third party data that will eventually be reported in auto-assessments of individuals who are beneficiaries and potentially also be used to generate effective tax rates for employers to withhold employee tax on trust distributions from individuals who are employees.

Trust Income Distributions (IT3(t))

Trustees will be required to submit data to SARS annually for resident trusts to declare distributions and vesting to beneficiaries using the new IT3(t) returns.

The new real-time reporting obligation will be applicable to trading trusts, trusts registered as public benefit organisations, family trusts, testamentary trusts, discretionary and vesting trusts but excludes employee share trusts, collective investment schemes and certain government trusts.

Trustees will be responsible for ensuring that the reporting is complied with. 

The high-level data required are the trust registration details, the beneficiary demographic data as well as the financial data in respect of nature of income flows, value of distributions and full flows of the trust itself.

The new real-time reporting obligation is resulting in various challenges for trustees.

To comply with the new reporting regulations, resolutions will have to be passed and signed before the end of the tax year (last day of February each year) and financial statements to be finalised earlier.

  • The income earned by trusts is generally made up of income from a number of different sources and historically the IT3’s / tax certificates in respect of the various asset classes are only made available by the various institutions in April/May following the end of the tax year in February. 
  • Fees charged and expenditure attributable to amounts distributed to beneficiaries, are part of the calculation of the amounts chargeable to tax in the hands of the beneficiaries, and these fees are often only quantified when the financial statements are produced and not available at the last day of February.
  • An additional complication is that trust income is often earned in respect of other assets for example, loan accounts in private companies. This information is only available once the underlying company’s financial statements have been finalised which might not be available at the last day of February.
  • Trustees will need to make distribution decisions potentially earlier than usual to ensure that they have the requisite information timeously for its declarations to SARS.
  • Trustees will need to ensure that management accounts for the trust are regularly compiled, with annual financial statements prepared and finalized timeously after the end of the financial year.

SARS is evaluating a monthly reporting protocol of distributions that have been declared or paid, with a final reconciliation report due at the end of the tax year. The concept is to emulate the existing EMP201 and 501 reconciliation protocols in respect of employees’ taxes.

Monthly reporting of any amounts vested or distributed, with a final report due at the end of February requires that trustees have sophisticated financial management systems in place to collate and process the data in real time.

SARS is cognisant of the impact that this move will have on smaller trusts and their trustees and is considering a phased process to allow for the proper systems to be implemented to meet the new reporting requirements.

How can Mazars help?

Mazars has the necessary financial and tax management system to assist trustees to comply with their reporting obligations.

If your trust requires our support to meet the reporting requirements outlined above, feel free to contact us for additional information, or for further assistance.

14 April 2023