“A trustee has a responsibility to guard the assets of others with a higher degree of care than he does his own.” (John Ashcroft)

Onerous new duties have recently been imposed on all trustees of all trusts - by government through legislative amendments, and also by SARS - in addition to their existing fiduciary duty to act in the best interest of all the beneficiaries and “with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another”.

The legislative amendments follow South Africa’s grey listing by the global financial watchdog, the Financial Action Task Force, and the subsequent changes to the Trust Property Control Act (TPCA) and the Financial Intelligence Centre Act (FICA), among others.

The new trustee duties will require extensive and time-consuming additional administration, and have impossible deadlines, while non-compliance can result in hefty penalties. This makes professional trust administration assistance crucial for trustees, now and in the future. 

Who is affected?

All trustees – not only independent trustees – are affected by the imposition of these new trustee duties.

In addition, all trusts are affected, regardless of the nature of the trust or the value of the assets in the trust, including family trusts, commercial and business trusts as well as public benefit trusts. Not even dormant trusts are specifically excluded.

The new regulations will also affect companies that provide services to trusts. Under FICA, the scope of ‘accountable institutions’ has recently been expanded to include trust service providers, company service providers, legal practitioners, crypto asset service providers, and clearing system participants, among others. These accountable institutions must conduct customer due diligence on their clients, including verifying identities, assessing the risk of illicit activities, and reporting suspicious activities. This will require significant resources, time and expertise from both trustees and accountable institutions.

What are the new duties and deadlines?

The legislative changes to the TPCA have given rise to trustee duties relating specifically to beneficial ownership registers and records of accountable institutions. In addition, SARS has issued new reporting requirements.

1. Updated beneficial ownership registers - trustees are now required to collect, record and maintain detailed information and specific records of the beneficial owners of the trust – who are now far more broadly defined to include founders, trustees, beneficiaries, donors and protectors. In addition, trustees must lodge a register of the prescribed information with the Master’s Office, with only a trustee or a person with power of attorney allowed to use the Master’s portal to do so.
   
   
2. Updated records of interactions with accountable institutions - trustees are now required to collect, record and maintain details pertaining to accountable institutions with which trustees have dealings, including, for example, accountable institutions acting as agents to perform trustee functions and accountable institutions providing any services to trustees. As noted, the definition of “accountable institutions” has also widened considerably.
   
   
3. Submitting an IT3(t) for each beneficiary - SARS recently issued a draft notice requiring trustees to submit an IT3(t), which provides details of any amount vested in a beneficiary including income (net of expenditure), capital gains and capital amounts distributed by the end of September so that beneficiaries’ tax returns can be pre-populated.

What are the penalties?

Failure to comply with the obligations as contained in the TPCA is an offence and, on conviction, trustees are liable to a fine not exceeding R10 million, or imprisonment for a period of five years or both.

Trustees are already non-compliant with the TPCA, as the new regulations were published after business hours on Friday 31 March 2023 and became effective on the next day, Saturday 1 April 2023. This means that trustees were simply unable to comply with the regulations by the deadline, both due to the timing of the gazette and delays in establishing the requisite online electronic register on the Master’s ICMS Web Portal.

SARS’s IT3(t) deadline seems more doable, but in reality, the 30^th of September is not that far away. Various stakeholders are submitting comments regarding the implementation of this requirement to submit an IT3(t) for each beneficiary, but probably no more than a delay could be expected.

Considering the extent of the new duties, the deadlines, and the hefty penalties involved, trustees are certainly well-advised to seek professional assistance to comply with these additional obligations and to ensure compliance.

“The difference between successful people and really successful people is that really successful people say no to almost everything.” (Warren Buffet, Investor)

Anyone who has ever started a business knows the feeling a new enquiry can generate. The excitement that things seem to be working, may make the new entrepreneur set aside their concerns and leap at any opportunity. The sad news is that this excitement to help anyone who asks could be diluting the brand, lowering the quality of output and even damaging the business’s ability to grow. Here are the signs it may be time to say no to an opportunity.

When you don’t have the capacity

Your hours are stretched as it is, but now a potential new client has come calling and you are determined to make it work. In the early days clients are a lifeline to a business, but there will come a point where taking on new responsibilities could see you dropping the ball when it comes to your other clients. With each new arrival, it is therefore important to carefully analyse your resources, and options and determine whether you can truly do justice to their needs, and those of your other clients, with the capacity you have. If you can’t, and you try, then you will only end up damaging your reputation for good work and harming your business in the long run.

When you don’t have the skills

Knowing what you can’t do is as important as knowing what you can do. Don’t assume you will learn as you go. Taking on work under your brand banner that you are incapable of delivering will be a death knell to your business.

When the long-term cost outweighs the short-term benefit

A new client has come in with a promise to pay you more money than you have ever seen for the next three months, but they need you to drop your other clients to do it. This is a perfect example of short-term gain being outweighed by long term benefit. Sure, these next three months will be good, but those clients you currently have won’t come back and worse, will tell others that you dropped them. Six months down the line, the new client’s money will be gone along with your original clients.

It’s not making financial sense – saying no to “barnacles”

Traditionally, it is thought that loyal customers are the heartbeat of a business, but increasingly studies are finding that businesses need to ask their accountants to regularly evaluate the value versus effort that these loyal clients are bringing to the business. Harvard business review suggests that some “loyal customers” may in fact be using more of your resources for less of your profit, preventing you from servicing other potentially more lucrative clients. These customers who use up your resources, perhaps through continued complaints, returns for changes, or negotiations for better prices, are referred to as “barnacles” and like barnacles on a ship they can slow down your business growth. Sometimes it might be better to have a frank discussion with these customers to see whether your business still fits their needs rather than simply saying yes to everything they ask, because they have been loyal.

“The government expects that, by encouraging companies to undertake R&D in South Africa, local companies will strengthen their capabilities of developing value-added products, technologies and services.” (Department of Science and Innovation (DSI) - South Africa)

Research and development (R&D) is essential to boost innovation in the business sector, as it improves the capability to develop new products and processes and to improve existing ones. This is crucial for improving competitiveness and growth of the South African economy.  

Section 11D of the Income Tax Act offers a R&D tax incentive to promote private sector R&D investment in South Africa. In the following paragraphs, you will find out what the incentive offers, which companies qualify, and the terms and conditions that apply. 

What does the R&D incentive offer businesses? 

Section 11D allows R&D spending to be considered when determining taxable income in two ways: 

1. A deduction equal to 150% of expenditure incurred directly for R&D; and
   
   
2. An accelerated depreciation deduction (50:30:20) for capital expenditure on machinery or plant used for R&D.

According to the DSI, the tax deduction will help to reduce the cost of R&D, which will enable companies to finance their R&D and scale up or undertake R&D activities sooner than otherwise.

Which companies can benefit from the R&D incentive? 

To be eligible, a company must be an incorporated entity and recognised as a company under the Income Tax Act. Individuals, non-profit organisations and trusts are not eligible.

As the aim is to encourage South African companies to invest in R&D, the incentive is available to businesses of all sizes and in all economic sectors.

Companies can also claim a deduction of R&D it outsources to another company, or to a South African university or science council. Companies in joint ventures (JVs) can claim to the extent that they fund the R&D. Prototypes and pilot plants created solely for purposes of R&D are also eligible.

However, where a company receives funding from government, a public entity or a municipality towards its R&D activities, this funding will be excluded when the R&D tax deduction is calculated.  

What are the terms and conditions? 

• The R&D activities must be approved by the Minister of Science and Innovation on recommendation by the R&D Tax Incentive Adjudication and Monitoring Committee that evaluates applications and reviews the annual progress reports that must be submitted.
  
  
• The R&D expenditure claimed should be incurred directly and solely for R&D undertaken in South Africa, and in the production of income and the carrying on of any trade.
  
  
• R&D expenditure claimed should be incurred after the date the application is submitted to the DSI. 
  
  
• Applications awaiting approval should not be included in provisional tax calculations to avoid penalties. Where approval is received after a tax assessment has been finalised, a Request for Correction can be made.
  
  
• There is an extensive list of exclusions and limitations. 
  
  
• Since last year, applications and progress reports can only be submitted via the new online automated system.
  
  
• According to the 2023 Budget Review, government is refining the R&D incentive to make it simpler to understand and administer.

Before claiming the R&D tax incentive against taxable income, and certainly before commencing any R&D activities in reliance on the tax incentive being allowed, ask your accountant to confirm that you can benefit optimally from this substantial incentive, while meeting all the requirements. 

• 7 June - Monthly Pay-As-You-Earn (PAYE) submissions and payments
  
  
• 29 June - Excise Duty payments
  
  
• 30 June – End of the 1st Financial Quarter
  
  
• 30 June - Value-Added Tax (VAT) electronic submissions and payments & CIT Provisional payments where applicable.