Historically, trusts’ financials, if they were prepared, did not receive the attention they deserved from trustees. Typically, under pressure from often unforeseen deadlines, it was left to the accountant to make do with bank statements, if they existed for the trust, or to literally compile the trust’s financial statements on a one-page journal, massaging the numbers until they appeared satisfactory.
The loan account usually serves as the balancing entry to balance the figures. Clearly, no supporting documents, such as resolutions and loan agreements, were in place, and the accountant had little understanding of the trust’s affairs to enable them to question or interrogate the numbers. In a tax case, Taxpayer D v CSars (IT 35476), in which the Johannesburg Tax Court delivered judgment on 5 February 2025, a taxpayer ended up owing a substantial amount of taxes, an understatement penalty, interest, and legal costs to Sars for the years of assessment 2014 to 2017 (a four-year period).
Various companies were involved, with loans made to and from the taxpayer. A company belonging to the taxpayer showed an amount payable to the taxpayer of R 42 million. Sars asked the taxpayer to explain the source of the R 42 million advanced to the company and why it should not be taxed by Sars as undeclared income earned by him, which enabled him to advance the amounts to the company. During the case, in an attempt to reduce the amounts payable to Sars, the taxpayer changed his narrative and asserted that the loan amount should actually be only R 3 million instead of the initial R 42 million.
The Court did not find that version credible. The taxpayer relied on his accounting and legal team to fight on his behalf and did not testify himself. When the taxpayer failed to satisfy Sars, an additional assessment was raised to include the amount in his gross income. The result was that Sars assessed the taxpayer on a total of R 57.1 million, consisting of undeclared income in the form of funds advanced to the company of R 37.1 million and R 20 million in undeclared interest income linked to various shareholder loan accounts.
Although this case pertains to a company, Sars’ message is clear: if you cannot convincingly explain the source of funds with supporting documentation, you will be vulnerable to scrutiny from Sars. Often, unexplained loans to and from trusts are part of multiple complex transactions between different individuals and legal entities. This makes them risky from a Sars perspective, particularly as the recent changes to trust tax returns and surge in verification letters from Sars focus on loan accounts to and from trusts. The following lessons can be learned from this case.
Remain involved and act with care, diligence, and skill
The taxpayer seems to have ‘blindly’ signed a set of financial statements reflecting a material loan of R 42 million, which, when it suited him in the case, was ‘corrected’ to indicate a value of only R 3 million. Unfortunately, trustees cannot claim ignorance and must ensure they thoroughly understand and agree with the details in the financial statements before signing off on them and submitting tax returns.
Section 9(1) of the Trust Property Control Act requires a trustee to perform their duties and exercise their powers in a manner that demonstrates they are acting with the “care, diligence, and skill” that can reasonably be expected of a person managing the affairs of another. It is essential to recognise that “skill” encompasses more than merely acting in good faith. With the definition of “diligence” being “conscientiousness in paying proper attention to a task; giving the degree of care required in a given situation,” trustees will clearly not evade accountability with a version similar to that provided by the taxpayer in this case.
Some interpret this section as prohibiting the appointment of a ‘puppet’ trustee, such as a friend or relative of the estate planner, who will merely follow the estate planner’s instructions blindly without exercising their own judgement and acting independently. The Slip Knot Investments 777 (Pty) Ltd v du Toit case of 2011 held that a ‘silent’, ‘sleeping’, ‘absent’, or ‘puppet’ trustee cannot claim ignorance and will be held jointly liable with the wrongdoing trustee(s). This underscores the requirement for all trustees to cooperate and participate in trust matters, including the preparation of financial statements and tax returns, regardless of a dominant or controlling trustee.
Many other parties, such as funders and beneficiaries, may be implicated in the financial statements and tax returns. Trustees cannot, for example, assist a funder of the trust, as in this case, when the funder changes their mind regarding loans to the trust. All loan transactions should be accurately recorded and supported by relevant resolutions and loan agreements to protect the trustees, funders, beneficiaries, and other interested parties from undue hardship.
Keep accurate, up-to-date records
With the usual one-page journal financials for trusts, the loan account as the balancing figure can easily be manipulated, leading the accountant to ask, “What do you want the number to be?” In many instances, transactions (movements) cannot be explained, and very few documents, such as resolutions, loan agreements, and bank account entries, exist. The FNB v Britz case of 2011 serves as a prime example where the Court was not impressed by the absence of supporting documents, resulting in the trust being penetrated by the bank.
Sars’ verification letters request detailed paperwork to support transactions, the absence of which can be detrimental to the trust, as evidenced in this case. Trustees are now required to submit all trust resolutions annually with the trust’s tax return. No longer can the accountant or tax practitioner retrospectively prepare these documents as if they were executed prior to the transactions, as Sars will highlight those documents for further investigation. Trustees must remember that Sars assesses the situation holistically and may request an explanation for the source of funds relating to loan increases.
Sars wrote to the taxpayer – “During the 2014 year of assessment, the Taxpayer advanced funds amounting to R 30 179 163 to Company A. The balance on this loan was R42 816 245 at the end of the 2015 year of assessment, resulting in an increase of R 12 637 082. The Taxpayer has not provided any proof to confirm the source of these funds. The income declared by the Taxpayer on his returns for the said year is low, and the inference is drawn that the Taxpayer received additional income in order to advance funds to Company A and has omitted the said income from his tax returns.
Even though the Taxpayer borrowed funds from the Taxpayer D Group during the same period the funds were advanced to Company A, there is no evidence to suggest any link between the borrowings from the Taxpayer D Group and advances made to Company A.” Therefore, one should take care of the broader ‘story’ involving yourself and other taxpayer entities you present to Sars and ensure it aligns cohesively.
Burden of proof on trustees/taxpayer
Section 102(1) of the Tax Administration Act 28 of 2011 states that “A taxpayer bears the burden of proving — (a) that an amount, transaction, event or item is exempt or otherwise not taxable.” The taxpayer in this case had to prove that the loan increases were exempt from tax or otherwise not taxable. Sars was of the opinion that he needed to generate substantial amounts elsewhere to enable him to advance that to the company. The Court was seeking the taxpayer to explain the actual movement of money, not merely journal entries. For that, bank accounts were necessary. This is often something that is lacking in trusts.
The court in this case held that “Granted, he may not be a person on top of accounting minutiae. But that was not the only reason why he was the only witness to testify on certain issues. He needed to explain, for a start, why he had signed the FGB accounts if they were incorrect. Then only he could explain why he had decided FGB had got the entries incorrectly. Why did he approve the FGB financial statements recording a loan account of R42 million, which now, in terms of the reconstructed accounts, is R3 million? The difference is so stark it called out for an explanation from him.”
Generally, due to the lack of documentation and the involvement of all trustees, they may struggle to discharge such a burden of proof. Recent changes in trusts’ tax returns and verification letters clearly indicate that Sars is scrutinising loans to and from trusts. In many cases, loans to trusts trigger tax anti-avoidance provisions and result in additional taxes (such as donations tax, as per Section 7C of the Income Tax Act). Loans cannot be merely reflected as year-end balances in the one-page journal financials, as the calculation of interest and taxes must be based on actual, daily moving balances, which are supported by resolutions, loan agreements, and actual transactions. This should serve as a warning for trustees to be prepared for the likely scenario that Sars will closely examine loans to and from trusts.
Do not abdicate responsibility and employ skilled persons to handle tax disputes
Taxation and tax disputes have become a specialised area of law. Often, trustees and other taxpayers rely on accountants or tax practitioners to manage these matters. Frequently, with trusts, the accountant or tax practitioner is too distant from the daily operation of the trust and must work with what they have, often too little in many instances.
The taxation of trusts, trust funders, and beneficiaries has become increasingly specialised. Therefore, it is advisable to engage a specialist trust tax practitioner to handle a trust’s tax affairs and calculate the income and capital gains generated within the trust but taxable in the hands of the trust funders or beneficiaries, rather than the trust itself. The trustees should work closely with the tax practitioner to understand these amounts and rectify any inaccurate information or assumptions upon which the tax practitioner relies. Ultimately, it remains the trustees’ responsibility to ensure the accuracy of the trust’s tax returns and communicate any taxable amounts to the relevant funders and beneficiaries. They cannot simply abdicate that responsibility to the accountant or tax practitioner. Additionally, trustees should ensure that a specialist is available when disputes with Sars arise.
Conclusion
Trustees must ensure they submit accurate, reliable information to Sars from the outset and refrain from providing conflicting accounts in an attempt to minimise taxes when a dispute arises. In this case, the taxpayer submitted four versions of the truth, which clearly backfired. The moment Sars issues a letter of audit findings during a dispute process, specialist tax dispute resolution experts should be engaged. A great deal of heartache can be spared if trustees utilise a proper system to effectively manage a trust’s affairs on an ongoing basis – that is actually how trusts ought to be run.
* Van der Spuy is a Chartered Accountant with a Masters’s degree in tax and a registered Fiduciary Practitioner of South Africa®, a Chartered Tax Adviser, a Trust and Estate Practitioner (TEP), and the founder of Trusteeze®, the provider of a digital trust solution.
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