How to Survive Trust Tax Season 2024
“A Trust is a ‘person’ for tax purposes and is therefore a taxpayer in its own right.” (SARS)
With Tax Season 2024 for trusts opening on 16 September, there’s no better time to draw trustees’ attention to SARS’ continued emphasis that all trusts must register for income tax purposes, including dormant trusts. Once registered, trusts are obligated to submit income tax returns that are aligned with other trust reporting requirements from SARS and substantiated by extensive supporting documents and information.
Trustees are held responsible for non-registration of trusts for income tax, and they will not be able to evade enforcement actions by blaming third parties for failing to file returns. “But I didn’t know I was meant to,” is not a valid excuse.
Trust tax returns can be filed from 16 September 2024 (much later than the usual June/July opening) until 20 January 2025.
Along with the new filing season dates, trusts also face several onerous compliance requirements – and some stiff potential penalties.
Onerous requirements
- SARS introduced changes to the Income Tax Return for Trusts (ITR12T) last year, with additional probing questions, and even more mandatory supporting documents.
- The range of mandatory and supporting documents that must be submitted with the ITR12T depends on the trust type, and may include:
- All certificates and documents relating to income and deductions
- Trust Deed and Letters of Authority
- Resolutions/minutes of trustee meetings
- Details of the ‘Main’ Trustee (the SARS registered representative)
- Financial statements and/or administration accounts
- Particulars of assets and liabilities
- Confirmation of banking details
- Proof of payment of any tax credits
- Supporting schedules
- Detailed disclosure of the beneficial ownership, including the submission of identity documents of all beneficial owners. This information will be checked against the beneficial ownership register lodged with the Master of the High Court. Non-compliance could result in a trustee receiving a fine of up to R10 million, a prison sentence of up to 5 years – or both.
- To provide SARS with a clearer understanding of the assets, income and activities within trust structures, trust returns now feature additional questions such as any local or foreign amounts vested in the trust as a beneficiary of another trust.
- Information reported on the trust tax return must also align with the IT3(t) reporting of prescribed information by trusts, now also mandated by SARS. It includes trust distributions and their beneficiaries, trust and beneficiary demographic information, trust financial flows, and amounts vested in a beneficiary, including net income, capital gains and capital amounts. The first IT3(t) certificates are due to be submitted at the end of September 2024 for the 2023/24 tax year, and then on an annual basis.
- Despite the above reporting deadline, SARS confirmed that trust beneficiary income tax returns will not be pre-populated with IT3(t) data for the 2024 year of assessment. This means trustees must also provide details of trust beneficiaries’ 2024 trust earnings timeously to the beneficiaries for inclusion in their personal income tax returns, for which the submission deadlines remain unchanged despite the change in the trust tax filing season.
We can help you survive Tax Season 2024!
Without professional assistance, surviving trust Tax Season 2024 would be a tough ask. The complexity of the processes and the new requirements exponentially increase the risk of errors. And that’s before you factor in the significant time required to manually upload the extensive list of supporting documents – especially in light of SARS’ increased efforts to improve tax compliance and the severe penalties for non-compliance.
Beware the Taxman When Accessing Your Three-Pot Retirement Savings!
“The two-pot system is meant to support long-term retirement savings while offering flexibility to help fund members in financial distress.” (National Treasury)
The three pots of the new retirement system
Tax and other issues
Withdrawing from any of the pots should be approached with caution. In addition to the fees that will be charged, and the potentially devastating impact on your eventual retirement savings, there are also tax implications that must be carefully considered.
- It’s significantly more expensive from a tax perspective to withdraw retirement funds before retirement age (normally 55), because the Withdrawal Benefit Tax Table or Individual’s Tax Table will apply. Instead, waiting until retirement to access savings – when the Retirement Fund Lump Sum Benefits or Severance Benefits Tax Table applies – is a far better tax option.
- Up to R550,000 drawn as a cash lump sum at retirement may be tax free. However, this R550,000 is a cumulative withdrawal total over your lifetime. That means this tax benefit could be eroded by pre-retirement withdrawals.
- Transfers from the Vested and Savings pots into the Retirement pot are also tax-free.
- Employer contributions are still treated as taxable fringe benefits.
- Early withdrawals from your Savings pot are considered income and are subject to income tax as per the tax directive the fund manager will request from SARS. What’s more, any outstanding taxes you owe SARS will automatically be deducted if you make a withdrawal.
- Depending on your annual income and the amount withdrawn, a pre-retirement withdrawal from your Savings pot – taxed at your individual marginal tax rate – could also push you into a higher tax bracket. This would mean paying more tax on all your income for the year. Here’s an example of the potential impact of withdrawing R80,000 from your Savings pot. Waiting until retirement age to withdraw the same amount could be tax-free.
Hidden costs of early withdrawals
Your full retirement fund contribution (one-third Savings pot; two-thirds Retirement pot) is still tax deductible up to 27.5% of annual income, up to a maximum R350,000 per tax year. This remains one of the biggest tax breaks out there, but is effectively cancelled out by the tax payable on an early withdrawal. Early withdrawals also have another cost – the loss of tax-free growth that could have been earned on your savings.
Continuing with the example above, if the R80,000 is not withdrawn, but instead left to grow at an average annual return of 10% for 25 years, the projected returns are R866,776 (equivalent to R201,958 in today’s terms assuming 6% inflation). This means you could lose tax-free growth of R121,958 by withdrawing just R80,000!
Help is at hand!
Understanding the tax and other implications of early retirement fund withdrawals in the short term and at retirement will help you to make better-informed financial decisions.
Early retirement fund withdrawals are likely to be more expensive in tax and lost investment growth compared to other options such as overdraft facilities, credit cards or home loans.
Your Tax Deadlines for August 2024
- 07 August – Monthly Pay-As-You-Earn (PAYE) submissions and payments
- 23 August – Value Added Tax (VAT) manual submissions and payments
- 29 August – Excise duty payments
- 30 August – VAT electronic submissions and payments, Corporate Income Tax Provisional payments where applicable, and Personal Income Tax Provisional payments.
