Duties of a trustee

Jun 11, 2021 | Article

This is a useful article setting out how important the role of a Trustee is and why appointment as a |Trustee should not be taken lightly – Ant Jenkins

By Louis van Vuren, CEO of FISA

Have you been asked to act as a trustee on a trust?

Are you planning to appoint a trustee?

This overview from FISA provides brief guidance on the responsibilities of a trustee and points out that it is not a role to be taken on lightly.

The Trust Property Control Act No. 57 of 1988 (“the Act”) defines a trust as an arrangement through which ownership of a person’s assets is entrusted to the trustees or beneficiaries, with the trustees being tasked to administer these assets according to the trust instrument for the benefit of the beneficiaries. (The trust instrument is the trust deed or the will in terms of which the trust is created).

Based on this definition, it is clear that the administration and governance of a trust is completely in the hands of the trustees, which means that the position of trustee comes with a substantial amount of responsibility. The Act requires a trustee to act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another. This is called a fiduciary relationship. The standard of care required of a trustee is similar to that of a director of a company. The fiduciary relationship requires the trustee to act honestly and in good faith in relation to the trust, the beneficiaries and the other trustees, and to exercise the powers that he or she may have to manage the trust in the interest of the beneficiaries and for their benefit.

The three main principles of trustee duties can be summarised as follows: 

• The trustees must carry out the trust deed as far as it is lawful and effective under the laws of the place where the administration is to take place
• The trustees must act “with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another”
• The trustees must exercise independent discretion in all matters except questions of law.

Trustees can be sued by the beneficiaries if they do not fulfil their fiduciary duties or are negligent in any way.  It is therefore essential for trustees to know and understand their duties. These duties are mainly imposed by the trust instrument, but there are also specific duties imposed by the common law and statute (specifically the Act). Here are some of the most important duties of a trustee:

• Know, understand and observe the trust instrument  – it is the founding document which gives the trustees their powers
• Take control of the trust assets
• Always act jointly and in good faith – contractual powers must be exercised by all trustees acting together
• Make the trust assets more productive – the trustees have a duty to obtain a reasonable return on the trust capital
• Keep trust assets separate – trust assets must never be blended with a trustee’s personal assets
• Always be impartial – trustees must, as far as possible, avoid conflict between their private interests and their duty as trustee. They must also, as far as possible, treat beneficiaries impartially
• Preserve the trust assets – this may in some instances extend to selling trust assets and re-investing the proceeds
• Keep accurate minutes of meetings, proper resolutions and comprehensive records of all transactions
• Provide the beneficiaries with details of the administration of the trust and its assets
• Open and maintain a bank account
• Register the trust assets (where applicable) and keep the assets identifiable as trust assets
• Keep safe custody and control of documents of the trust
• Prepare and submit income tax returns
• Account to the Master of the High Court if called upon to do so
• Have in-depth knowledge of  all relevant laws that govern and/or impact trustees, including but not limited to the:
• Trust Property Control Act 57 of 1988
• Immovable Property Act 94 of 1965
• Income Tax Act 58 of 1962
• Estate Duty Act 45 of 1955
• Have a working knowledge of the law of contract, property and marriage
• Be familiar with prudent investment vehicles
• Have knowledge of Foreign Exchange Control Regulations
• Have knowledge of the Financial Sector Conduct Authority (previously the Financial Services Board) and its reporting requirements

It should be evident from the above that the role of trustee is not an appointment to be taken lightly. It is important when appointing a trustee to ensure that the person understands the legal requirements applicable to trustees and has the necessary experience. It is therefore wise to appoint a person who is a member of a professional body that sets high ethical standards for its members.

Got Cryptocurrency? Here’s How Much SARS Wants…

Jun 2, 2021 | Article

This is an interesting article by accountants Alan H English on the tax implications of holding or trading in Cryptocurrencies.

The future of money is digital currency” (Bill Gates, Co-founder of Microsoft)

Note: The risks and consequences of wilfully or negligently failing to make full and true declarations to SARS, or to submit documents or information requested by SARS are now substantial, so ask your accountant for advice specific to your circumstances!

Cryptocurrencies have been around for over a decade, with the first and most famous one – Bitcoin – launched in 2009. Since then, many other cryptocurrencies have been created and supported in the market, including for example Ethereum, Litecoin, Dogecoin and Bitcoin Cash.

Regulators have been slow in responding to the rapid fintech developments behind cryptocurrencies. However, further cryptocurrency regulation is certainly on its way, and the Intergovernmental Fintech Working Group (IFWG), a group of South African financial sector regulators, published a policy position paper on crypto assets to provide specific recommendations for the development of a regulatory framework.

In the meantime, however, many cryptocurrency owners may be unaware that their cryptocurrency gains will most certainly be taxable by SARS – and in the year of assessment in which income or gains are received by or accrue to the taxpayer – not only if or when the cryptocurrency is withdrawn and converted into legal tender.

What’s the sudden spotlight on cryptocurrencies?

A number of recent developments have catapulted cryptocurrencies into the spotlight.

The first was the Bitcoin boom over the last year. Having maintained a price under $10,000 for years, excluding two peaks in December 2017 ($13,000) and June 2019 ($12,000), Bitcoin’s price started to skyrocket in September 2020 as big-name companies such as PayPal, Mastercard and Square began to accept it.

Early in 2021, the price of Bitcoin reached a staggering $60,000, following Tesla’s announcement that it had acquired $1.5 billion worth of Bitcoin and the public listing of US cryptocurrency platform Coinbase Global on the Nasdaq. In February, Bitcoin breached the $1 trillion market capitalisation mark.

Local Bitcoin investors would have seen the price of their bitcoin jump from under R100,000 in March 2020 to just under R430,000 at the end of 2020 to almost R1 million in April 2021, doubling in value in just a few months.

Many South Africans started investing in cryptocurrencies during the boom, with a global crypto platform operating locally saying it had registered more than a million new cryptocurrency accounts in under two months, South Africa being in the top four highest growth locations.

SARS’ scrutiny not surprising

It is not surprising that these substantial gains and the fast-growing number of South African investors in cryptocurrencies have come under specific scrutiny from SARS. It presents an opportunity to collect substantial taxes from a previously untapped source at a time when all other options for tax increases and new taxes have been exhausted.

In addition, earlier this year, R3 billion was allocated to SARS in the Budget to improve its ability to track undeclared assets and income, including a dedicated unit to uncover “undisclosed offshore assets, including crypto-assets such as bitcoin” and other cryptocurrencies.

Unfortunately, very few South Africans holding cryptocurrency are likely to be aware of the tax liability they could be facing.

So, while cryptocurrency platforms are not yet legally required to report on their clients and while SARS boosts its tracking abilities, our tax authority has simply begun asking for information on crypto transactions in audit letters issued to taxpayers – even to taxpayers that have never traded in cryptocurrencies.

The information requested includes the purpose for which the taxpayers purchased cryptocurrency, as well as bank statements, and a letter from the trading platform(s) confirming the investments and the relevant trading schedules for the period.

Thanks to recent legislative changes that have made it a criminal offence for a taxpayer to wilfully fail to submit a document or information as requested by SARS, or to make a false statement to SARS, non-compliant taxpayers could be liable to a fine or imprisonment for up to two years – or up to five years for attempted tax evasion or obtaining an undue refund.

SARS’ stance

In 2018 SARS issued a media statement confirming that the existing tax framework and normal tax rules will apply to cryptocurrencies and that affected taxpayers are expected to declare cryptocurrency gains or losses as part of their taxable income.

It said that cryptocurrencies such as Bitcoin are considered by SARS to be “assets of an intangible nature”, and that capital gains tax or normal tax may apply, depending on whether you are investing for the long term or trading actively for short-term gain. SARS will likely consider cryptocurrency-related gains to be revenue in nature and the onus will be on the taxpayer to prove otherwise.

For long-term investors, cryptocurrency is deemed “capital assets” and gains will be taxed at Capital Gains Tax rates – up to 18% for individuals and 22.4% for companies. The purchase price of cryptocurrency is deemed to be the price paid on date of purchase.

Active trading will ensure your cryptocurrency is considered “trading stock”, with the income “received or accrued” falling under the definition of “gross income” in the Income Tax Act and profits taxed at normal income tax rates, between 18%–45% for individuals and 28% for companies.

Cryptocurrencies income can be “earned” in various ways, all of which are subject to normal tax.

1. A cryptocurrency can be obtained by so-called “mining”. According to SARS, until it is sold or exchanged for cash, cryptocurrency obtained in this way is held as “trading stock” that can then be realized through an ordinary cash transaction, or through an exchange transaction.
2. Cryptocurrency may be received as income by a self-employed independent contractor for performing services; or received as remuneration or wages for services from an employer.
3. Cryptocurrency may be accepted as payment for goods or services. Where goods or services are exchanged for cryptocurrencies, such a transaction is deemed to be an exchange transaction and the usual exchange transaction rules apply.
4. Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, or by private transactions.
5. If a trade is made between two cryptocurrencies, for example Bitcoin and Ethereum, the profits are also taxable.

Failure to declare cryptocurrency holdings, income and gains could result in interest, penalties and criminal prosecution.

What you should do now

(Remember to get expert advice specific to your circumstances!)

• SARS says that the responsibility rests with taxpayers to declare all taxable income in respect of cryptocurrency in the tax year in which it was received or accrued. If you mined cryptocurrency; bought any cryptocurrency; exchanged cryptocurrency for another cryptocurrency; or were in any way paid in cryptocurrency, it must be declared.
• As with other asset classes, it is important to understand cryptocurrency investments and the attendant tax obligations, and to plan accordingly. A buy-and-hold strategy is more tax efficient, but professional tax advice is recommended for each individual case.
• If you have received a request for information from SARS – whether or not you have traded in cryptocurrency – immediately contact your accountant for professional assistance.
• Whether or not you have received communication from SARS, if you have not disclosed cryptocurrency holdings, income gains and losses, contact your accountant for specialist tax advice.
• Keep records of all transactions – according to SARS conventional receipts and/or invoices are acceptable proof of purchase and sale price.
• Use software to track crypto transactions – cryptocurrency platforms do not provide SARS compliant tax certificates such as the IT3c provided by financial services institutions for tax returns.
• Declare cryptocurrency holdings, income, gains and losses correctly –
  • SARS has already included questions about cryptocurrency investments in the capital gains tax portion of tax returns;
  • The income or market value thereof forms part of total taxable income in respect of the year of assessment on a provisional tax return (IRP6);
  • Taxable income in the source code or tax return container field provided on the ITR12 form.
• Individuals can make use of the annual Capital Gains Tax exclusion of R40,000.
• Claim deductions – deductions against cryptocurrency income are allowed if they meet the requirements of the Income Tax Act, including whether expenditure is incurred in the production of income or for trade purposes – for example costs relating to computers, servers, electricity and internet service provider charges.
• Offset losses – losses on cryptocurrency bought as investments will count as capital losses. However, it can only be deducted from capital gains. If there are no capital gains to deduct losses from, the losses can be carried over to the next tax year. You will be well advised to obtain expert tax guidance in this regard.

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Disclaimer

The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

This is a useful article pertaining to the use of Trusts in situations involving Dementia

May 21, 2021 | Article

(I am of the opinion, however, that the portion that I have italicised below, may not be completely correct as there are limits to what a Trustee may and may not do on behalf od such a person, and where a Curator Bonis would be required. I do agree, however, that a Trust can be useful to a certain extent in these circumstances)

The article

An ageing worldwide population carries a high risk of dementia, a condition that is so far neither preventable nor curable. An estimated 35.6 million people – differently put 0.5% of the global population – are affected.

Alzheimer’s disease (a condition that affects the brain) is the most common form of dementia, a general term for memory loss and other intellectual abilities serious enough to interfere with daily life. It is named after Dr Alois Alzheimer, who first described the condition in 1906. It accounts for 50% to 80% of dementia cases. It is a progressive disease – the symptoms are mild at first and become more severe over time. In the case of very serious forms of mental illness, a person may not be able to look after their own affairs any longer.

In the event that a person becomes mentally disabled a trust can be used to avoid the need to place a person under curatorship. A board of trustees, selected by the person, can then look after the financial affairs of that person.

From a tax perspective, the Income Tax Act makes provision for the creation of a special trust, where the trust is created for the benefit of a person who cannot take care of their own affairs due to a disability, such as a serious mental illness.

A special trust established during the life of a person is one created for the benefit of one or more persons with a disability as defined in Section 6B of the Income Tax Act – this includes a moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment that has lasted or has a prognosis of more than a year. It is required that the disability must be diagnosed by a duly registered medical practitioner. Alzheimer’s Disease and simple senile dementia fall within this definition.

On 28 June 2018 the South African Revenue Service (Sars) issued a binding private ruling (BPR 306) in which the applicant, a person in the early stages of dementia, but still lucid and with the capacity to contract, distributed part of her estate to a special trust she had established for her care and maintenance.

With a BPR, Sars provides an advance tax ruling on a transaction that is still to be concluded in the future. The purpose of this system (and the BPR) is to promote clarity, consistency and certainty regarding the interpretation or application of one of the tax acts administered by Sars, such as the Income Tax Act. It is important to note that a BPR may not be cited in any proceeding before Sars or the Courts, other than a proceeding involving the taxpayer applicant. The BPR does, however, provide more clarity on how Sars is likely to interpret any particular provision of a tax act. The specific facts present on the BPR provided must be considered if one wishes to be guided by its application since the BPR is based on a specific set of facts that may influence the outcome of Sars’s view.

The lady created a discretionary trust with herself as the primary beneficiary with other beneficiaries listed as secondary beneficiaries – the founder was to benefit alone from the trust until her death. The purpose of the trust was to provide for the applicant’s care and maintenance when she was no longer able to do so. The fact that there were other beneficiaries did not affect the trust’s status as a special trust, because their discretionary right would come into operation only on the death of the applicant.

In addition to the trust serving as a vehicle to look after her during her lifetime, it also serves an estate planning purpose as one may establish a special trust that continues seamlessly for the benefit of the remaining beneficiaries without the need to terminate the trust and create a new one for those beneficiaries – this is achieved by establishing two classes of beneficiaries and only the disabled person having rights until that beneficiary’s death.

Sars ruled that the move of her assets to the trust was not a donation as contemplated in Sections 54 and 55 of the Income Tax Act. If you have created a trust during your lifetime and become afflicted by one of these dreadful conditions, your financial affairs would continue as before, with persons that you entrusted as trustees of the trust.

If you do not yet have a trust set up by the time you become mentally disable, you should do so at an early stage whilst you are still lucid and have the capacity to contract. A special trust is not a viable solution for persons already suffering from mental incapacity but may be useful as a remedy in anticipation of incapacity. The appointment of trustees should also be carefully considered in anticipation of these circumstances.

~ Written by Phia van der Spuy ~

This is an interesting article on the use of “Business” or “Trading” Trusts

May 21, 2021 | Article

Bankruptcies in South Africa averaged 229 companies per month from 1980 until 2020. In August 2000, an all-time high of 511 companies declared bankruptcy, compared to the record low of 63 companies in May of 1988. Projected bankruptcies for 2021 is 220 companies per month and 240 companies per month for 2022. It is a known fact that more than 90% of business owners close their doors within five to seven years of opening them. Up to 90% of these business owners were likely stripped of their personal assets, resulting from sureties and guarantees that they signed as business owners. This could have been avoided had the business owner set up a trust to protect their assets from SARS, the banks, and other creditors.

The “newer type of trust”
A trust which carries on business activities is often referred to as a ‘business trust’ or ‘trading trust’.

Similar to any other type of trust, in layman’s terms a business trust can be described as a legal arrangement or instrument which is created to hold and manage assets for the benefit of certain individuals and/or entities – its beneficiaries.

A trust is not regarded as an independent entity or juristic person that can be owned, sold, or transferred as would be the case with a company or a close corporation in terms of the common law, nor in terms of the Trust Property Control Act. A business trust was referred to by the court in the Vrystaat Mielies case of 2004 as “a newer type of trust”.

Without legal personality a trust cannot own property. Any property held in trust is held by the trustees in their capacity as trustees. Section 12 of the Trust Property Control Act requires trust property to be held separately from the trustees’ personal estates.

An alternative to a company, regulated by the Companies Act
The introduction of the Companies Act of 2008 brought about a fundamental shift to the left in company law.

As an example, Section 76 of the Act states that a director must act with care, skill and diligence. Section 218(2) of the Act states that any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention. Section 20(9) of the Act states that if there is an unreasonably excessive abuse of the company as a separate entity, the Court may declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company or make any further order the court considers appropriate.

Such a declaration may leave assets at risk. The Court even held in the Stephen Malcolm Gore case of 2013 that the Section 20(9) remedy should not be regarded as exceptional, or ‘drastic’ – therefore totally acceptable. It may therefore be prudent to consider other types of business forms.

A trading or business trust can therefore be structured to resemble a company or close corporation, whereby trustees can be compared to the directors of a company and beneficiaries can have the rights similar to shareholders. If structured correctly, a trading trust can provide a limited liability form of trading without the complexities or expense inherent in trading through companies and close corporations.

These trusts are inter vivos trusts, formed to ensure the continued operation of a business that has a profit incentive.

Trusts can be used for trading purposes
A trading trust can be used as an alternative to other business structures such as a company, close corporation, partnership or sole proprietorship.

It may be a good strategy to let the trust own the assets, which are leased to an operating company, to protect the assets from operating risks. The Magnum Financial Holdings (Pty) Ltd (in liquidation) v Summerly case of 1984 confirmed that a trust can be used for trading purposes by acquiring assets and incurring debt and can therefore be sequestrated. Trust creditors can therefore look to the trust’s assets for settlement of their claims and not to the founder, trustees or beneficiaries.

Trustees will only be liable for trust debt if they have personally bound themselves to be responsible for trust debt or if they have acted in a way to be held personally liable.

Lack of regulation
The main statute that governs South African Trust Law is the Trust Property Control Act 57 of 1988, which only regulates certain administrative aspects relating to trusts.

In 1987, the South African Law Commission recommended that the law of trusts should not be codified (arranged into a systematic code) and that only certain administrative aspects relating to trusts should be regulated.

Although the Act does regulate certain aspects of trusts, it gives no guidance as to trustees’ powers, which must derive from the trust deed itself. As a result trust deeds may contain very different provisions, with only a few court cases as guidance. Although most trust deeds have certain standard clauses, a trust deed is a mere contract in which the founder can express their unique wishes and terms.

Trading trusts also need not be audited, except when required by the Master of the High Court or the trust deed. Although this may make a trading trust cheaper and easier to run than other business forms, this lack of oversight may be detrimental to an outsider contracting with the trust.

~ Written by Phia van der Spuy ~

Could your Trust be disregarded by the Courts?

May 14, 2021 | Article

Instruction on a will not enough, court rules

Apr 30, 2021 | Article

A written instruction to draft a will cannot be elevated to the status of a will, the Western Cape High Court has ruled.

Rapport reports that family members of as deceased person approached the court to declare that her written and signed instruction to Nedbank to draft a will should be viewed as such. The deceased had  instructed the bank a day before her death to make her minor son the beneficiary of her assets.

The 44-year-old woman died from cancer before the will was drafted and signed. The Judge said in his judgment the family wanted the court to take a ‘liberal approach’ to the instruction document, but he was not convinced it was justified. The husband of the deceased opposed the application.

He will likely inherit his late wife’s share of their joint estate as Elaine died intestate.

Source: LegalBrief